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Human Resources

FTC Proposes Broad Rule Prohibiting Non-Compete Clauses

Attorney Harrison Oldham

 

 

On January 5, 2023, in response to President Biden’s July 9, 2021 Executive Order requesting a broad ban on employer non-compete agreements, the Federal Trade Commission (“FTC”) proposed a new rule that would ban virtually all non-competes (with some exceptions), including those already in effect, and would forbid any workaround that achieves a similar effect.

 

According to a 2019 study by the Economic Policy Institute, non-compete agreements are estimated to be used by roughly half of private-sector businesses, and anywhere between 36 and 60 million Americans are affected. The White House’s estimates are similar: that non-compete agreements are used by roughly half of private-sector businesses for at least some of their employees. Additionally, according to the FTC’s own estimate, the proposed rule would affect nearly 1 in 5 employment agreements in America, many of which were privately negotiated for significant consideration.

 

The proposed rule is based on the idea that non-compete agreements violate the Federal Trade Commission Act as an unfair competition method.  Accordingly, the rule would constitute a near total ban on substantially all non-compete agreements by defining them as an “unfair method of competition” under Section 5 of the FTC Act.

 

The proposed rule declares that it is “an unfair method of competition for an employer to enter into or attempt 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.”

 

The rule would effectively ban all existing and future non-compete clauses, subject only to a narrow exception for non-compete clauses between the seller and buyer of a business that would only be available where the restricted party is a “substantial” owner of the business with at least a 25% ownership interest.

 

As written, the rule broadly defines a non-compete as a contractual provision preventing an employee from “seeking or accepting employment with a person, or operating a business,” after the employment relationship ends. It also includes a functional test to determine whether a clause that is not explicitly a non-compete may be a de facto non-compete.  While the proposed rule claims to exclude most other restrictive employment covenants, such as non-disclosure agreements and non-solicitation agreements, the proposal notes that such covenants could be deemed a non-compete clause under the proposed rule where they are “so unusually broad in scope that they function” as a de facto non-compete clause.

 

With respect to existing non-compete clauses, employers would be required to rescind all such provisions within 180 days of publication of the final rule and provide individualized notice of the recission to current and former employees.  Additionally, the proposed rule would preempt all state and local rules that are not “consistent” with the provisions but would allow state laws or regulations that provide greater protections for workers.

 

The FTC will soon publish the proposed rule in the Federal Register, and stakeholders will have sixty days to submit comments. This is likely to be the only chance for interested parties to comment on the proposed rule and build a record of its anticipated effects, including potential unintended consequences that the FTC has not yet considered.

 

After the comment period closes, the FTC will vote on whether to promulgate the final rule. Business groups are likely to challenge the rule in court at that point, but if the final rule is not enjoined, businesses will have a 180-day grace period to comply with it.

 

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About Harrison Oldham

Harrison grew up in Mansfield, Texas. He attended Texas A&M University for his bachelor’s degree, where he met his wonderful wife, Kelsey. After graduating magna cum laude from Texas A&M, he attended SMU Dedman School of Law, graduating with honors in 2012. Today, Harrison and his wife live in Dallas, Texas with their son, Teddy.

Since graduating from SMU Law, Harrison has worked exclusively in the field of business law. He has spent time in private practice and in-house, working with clients of every size; from single person startups to Fortune 250 companies. Today his practice focuses on serving the diverse needs of businesses and individuals throughout Texas. You can learn more about Harrison by visiting his website, at: http://lonestarbusinesslaw.com/.

The post FTC Proposes Broad Rule Prohibiting Non-Compete Clauses appeared first on Your HelpDesk for HR .

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