The Federal Trade Commission (“FTC”) has proposed a new rule that would make employment non-competes largely illegal. The rule would further preempt all conflicting state and local laws. Prior to issuing a final rule, there is a notice and comment period during which the public may submit comments to the FTC regarding the proposed rule. That period runs through March 6, 2023.
Is Your Employer Covered by the Proposed Rule?
The rule broadly applies to any person who “works” for an employer, including independent contractors, who provide a service to a client or customer.
What Does the Proposed Rule Prohibit?
The Proposed Rule states that it is an “unfair method of competition” for an employer: (1) to enter into a non-compete agreement with a worker; (2) maintain an existing non-compete agreement with a worker; or (3) tell a worker that he or she is subject to a non-compete agreement (with very limited exceptions).
What is a “Non-Compete Agreement”?
A non-compete agreement is a contract between an employer and employee which prohibits the worker from certain work, after the employment ends.
Under the FTC’s Proposed Rule, a “functional test” will determine whether a contract is a non-compete or not. In other words, just because your employer calls it something else (a lot of non-compete agreements are buried in documents simply called “Non-Disclosure Agreements”).
The Proposed rule would also prohibit an employer from requiring an employee to repay training costs, where the payment is not reasonably related to the costs the employer incurred for the training.
Are There Exceptions?
Not many. Non-competes are still permissible if entered into for people who are selling a substantial (over 25%) of their business.
What’s Next?
The public may submit comments through March 6, 2023, after which the FTC may issue a final rule. If the FTC issues a final rule, the Proposed Rule would become effective 60 days thereafter (employers would have 180 days after the rule becomes final to comply). It is probable that any final rule will be challenged in court.
Questions? Concerns? Learn more about our services, which include reviewing non-compete agreements in New York City (646.524.6001) and Cleveland, Ohio (216.600.7994). Just want to talk about your situation? Feel free to contact us any time.