Could the FTC’s proposed rule on non-compete agreements mean the end of employers preventing employees from accepting new work?

Submitted by Randal Cole & Alexander Masson, Dawda Mann

The Federal Trade Commission (“FTC”) recently proposed a new rule which would ban non-compete agreements between employers and workers. The rule would impact employees, contractors, and other workers.

“As of January 13, 2023, the rule is still being considered, and before adoption, the rule is subject to a 60-day comment period,” said Alexander Masson, Associate, Dawda, Mann, Mulcahy & Sadler, PLC.

This proposed rule is based on the FTC’s preliminary finding that non-compete agreements constitute an unfair compensation method. The FTC defines non-compete clauses as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment.”

Further, the rule prohibits broad non-disclosure agreements, stating the agreements “effectively preclude a worker from working in the same field” after separation.

Notably, the FTC’s proposed rule does not prohibit agreements that restrict outside work by employees during their term of work for their employer. However, the rule provides one exception for enforcement of non-compete agreements related to the sale of a business (or sale of a person’s ownership interest in a business) when the person restricted by the agreement is a “substantial owner [owning at least 25 percent of]…the business entity measured at the time the person enters into the non-compete clause.”

The rule does not currently provide exclusions for management, executives, or other workers who are privileged to trade secret or highly confidential information.

Although the FTC’s rule is not final, employers should review their current policies, procedures, hiring processes, and other agreements containing non-compete, non-solicitation, and/or confidentiality provisions. In addition, employers may have an affirmative duty to rescind and inform workers that such agreements are unenforceable.

“We recommended that employers take a careful look at any intellectual property or trade secret provisions,” said Randal Cole, Member, Dawda, Mann, Mulcahy & Sadler, PLC. “If the rule is implemented, these provisions become one of the most useful tools available to employers.”

Reach out to the attorneys at Dawda Mann to discuss impacts on your businesses.