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Proposed Rule on Non-Competes a Potential "Game Changer" for Employers

January 19, 2023

Earlier this month, the Federal Trade Commission (FTC) issued a proposed rule that would effectively ban all non-competes with employees and other workers. If adopted “as is,” the Proposed Rule would force many companies to change their practices and procedures around protecting trade secrets and other competitively sensitive information. However, there remains a great deal of uncertainty regarding when a final rule will take effect and how broadly it will apply.

Even with that uncertainty, the Proposed Rule is a major change and its implementation would represent a significant departure from current law in many states.

The Proposed Rule

In its current form, the Proposed Rule would eliminate nearly all post-employment non-compete restrictions. Key aspects the Proposed Rule include:

  • Defines non-compete clauses broadly to include any 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 with the employer."
  • Treats all workers the same and specifically does not distinguish between low-wage and highly compensated employees or contain exceptions for employees with access to trade secrets or other competitively sensitive information.
  • Applies not just to employees but to all types of workers, including independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide a service to a client or customer.

The FTC's commentary to the Proposed Rule indicates that other types of agreements may be considered "de facto non-competes," and thus would be prohibited, if they have "the effect of prohibiting [a] worker from seeking or accepting work with a person or operating a business after the conclusion of the worker's employment with the employer."

The Proposed Rule would require employers to rescind any non-competes entered into prior to the rule's effective date by providing notice via individualized communication to any workers already subject to non-compete restrictions. The Proposed Rule contains model notice language and provides for a safe harbor for employers that provide notice of rescission in accordance with the model.

A 60-day public comment period on the Proposed Rule will end March 10. Following the public comment period, it is expected that the FTC will publish a final rule which would take effect 180 days after publication. Legal challenges are expected once a final rule is published, particularly if the final rule significantly resembles the Proposed Rule.

Johnson & Bell’s Employment group continues to monitor this development.  If you have any questions about this issue, please contact Christopher J. Carlos, Caroline K. Vickrey or Michael R. Sherer.

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