The feds are coming for your company’s noncompete agreements, old and new. You need to read THIS!

Yesterday, the Federal Trade Commission proposed a new rule prohibiting employers from imposing noncompetes on their workers.

When I shared the news on LinkedIn, someone commented, “Yeah, bold move FTC…”

And I was like, “Bold move is wearing seersucker before Memorial Day. This is MINDBLOWINGLY HUGE!”

Folks, it’s only January 6, and this will be the most significant employment law news of 2023. Unless, of course, you do business in CA. We know; hold my drink.

Hold up, Eric, before you explain the proposed rule, please tell me you’re going to have a Zoom about this too. Please!!!

Amy Epstein Gluck, Christina Bost Seaton, and I will host The Employer Handbook Zoom Happy Hour – EMERGENCY MONDAY EDITION!!! on Monday, January 9, 2023, at 1 pm ET. Space is limited to 1000 people. Click here to register. (https://us02web.zoom.us/meeting/register/tZIkd-mprz0qEtIm-DTX99WbjRzltNA1jIu7)

We will try to answer all of the hypothetical questions that you ask for a friend, and we’ll do so without creating any attorney-client privilege or offering any legal advice.

What is the FTC doing?

The FTC’s proposed rule would generally prohibit employers from using noncompete clauses. Specifically, the FTC’s new rule would make it illegal for an employer to enter into or attempt to enter into a noncompete with a worker.

Does this cover all employers?

Yes.

What is a “worker”?

Worker means a natural person who works, whether paid or unpaid, for an employer. The term includes, without limitation, an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.

The term worker does not include a franchisee in the context of a franchisee-franchisor relationship; however, the term worker includes a natural person who works for the franchisee or franchisor. Noncompete clauses between franchisors and franchisees would remain subject to Federal antitrust law as well as all other applicable law.

But existing noncompetes are safe, right?

WRONG!

An employer that entered into a noncompete clause with a worker before the compliance date must rescind the noncompete clause no later than the compliance date.

When is the compliance date?

180 days after publication of the final rule.

Wait, go back to the part about rescinding existing noncompetes; how do we do that?

The FTC has prepared model language for employers to communicate the rescission to the worker. An employer may also use different language, provided that the notice communicates to the worker that the worker’s noncompete clause is no longer in effect and may not be enforced against the worker.

Does the proposed rule apply to other types of employment restrictions, like non-disclosure agreements?

Generally, no. Other types of employment restrictions could be subject to the rule if they are so broad in scope that they function as noncompetes. The FTC provides these examples of potentially de facto noncompete clauses:

• A non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.
• A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.

The proposed rule is silent about non-solicitation agreements.

What if I sell my business? Are those noncompetes impacted?

The proposed rule will not apply to a noncompete clause that is entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets, when the person restricted by the noncompete clause is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the noncompete clause. Noncompete clauses covered by this exception would remain subject to Federal antitrust law as well as all other applicable law.

Who is considered a substantial owner, member, or partner?

Substantial owner, substantial member, and substantial partner means an owner, member, or partner holding at least a 25 percent ownership interest in a business entity.

What if my state has different rules?

The proposed rule does not supersede any State statute, regulation, order, or interpretation to the extent that such statute, regulation, order, or interpretation is inconsistent. A State statute, regulation, order, or interpretation is not inconsistent if the protection such statute, regulation, order, or interpretation affords any worker is greater than the protection provided in the proposed rule.

This sounds awful! How do we let the FTC know?

Comments will be due 60 days after the Federal Register publishes the proposed rule.

What might change over the next 60 days?

Among other things, the FTC could allow noncompetes for senior executives (or at least subject them to a rebuttable presumption). The FTC could also create different standards for low- and high-wage workers.

Is there anything that can stop the FTC?

I’d wager that there will be lawsuits to block this rule. One of the dissenting Commissioners has a roadmap.

But, if the final rule takes effect, can our current and former employees sue us for violating it?

No, but the FTC can enforce it.

Where can we learn more about the proposed rule?

Amy wrote about the proposed rule here.

The FTC has offered additional resources too.