The FTC’s Proposed Rule on Non-Competes for Employees

Approximately 30 million people, or 1 in 5 American employees, are bound by a non-compete clause, and this number has trended up over time.  Some states, including California, North Dakota, and Oklahoma have laws making noncompete clauses void for most workers. Eleven other states have also set limits on non-compete provisions based on factors such as the amount that a worker earns, and some states specifically exclude categories of workers, including restaurant workers, from being bound by non-compete clauses.

On January 8, 2023, the Federal Trade Commission (“FTC”) published a broad proposed rule to ban noncompete clauses in employment agreements.  The proposed rule prohibits employers from entering into or attempting to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause. Employers who have existing non-compete clauses in their employment agreements at the time the rule goes into effect must rescind the non-compete clause no later than the compliance date, and are required to provide notice to the employee of the rescission.

The rule contains an exception for non-compete clauses that are entered into by “a person selling a business entity or otherwise disposing of all 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 non-compete clause is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause.”  In the context of restaurants, a high percentage of non-competes involve the sale of business or business interests, which would still be permitted under the new rule.

Comments to the proposed rule are currently due on March 20, 2023, and may be submitted here.  Business industry groups, including the U.S. Chamber of Commerce, have asked the agency to extend the comment period to accommodate a high level of interest.  The compliance date for employers will be 180 days after the final rule is published.