On January 5, 2023, the Federal Trade Commission (“FTC”) issued a groundbreaking proposed rule that would, if finalized:
- prohibit most employers from entering into non-compete clauses with workers, including employees and individual independent contractors;
- prohibit such employers from maintaining non-compete clauses with workers or representing to a worker that the worker is subject to a non-compete clause; and
- require employers to rescind any existing non-compete clause with workers by the compliance date of the rule and notify the affected workers that their non-compete clause is no longer in effect.
The FTC’s notice of proposed rulemaking explains that the FTC considered possible limitations on the rule—such as excluding senior executives or highly paid employees from the ban—but it ultimately proposed a categorical ban on non-competes. The only exception is for non-competes related to the sale of a business. However, even this exception is unusually narrow: it would only apply to selling business owners who own at least 25% percent of the business being sold. (The proposal also would not apply to most non-profits, certain financial institutions, common carriers, and others who are also outside the scope of FTC regulation.)
As discussed in Covington’s January 5 client alert, the FTC explained that it issued the proposed rule due to its belief that non-competes reduce wages, stifle innovation and business, and are exploitative and unnecessary.