How New Rule Banning Non-Compete Agreements Could Impact Employers and Contract Workers

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

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 1/13/2023, the rule is still being considered, and before adoption, the rule is subject to a 60-day comment period.

This proposed rule is based on the FTC’s preliminary finding that non-compete agreements constitute an unfair method of competition. 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. 

It is recommended that employers take a careful look at any intellectual property or trade secret provisions. If the rule is implemented, these provisions become one of the most useful tools available to employers.

About the Authors

Randal R. ColeRandal R. Cole is a Member with Dawda, Mann, Mulcahy & Sadler, PLC. Prior to receiving his law degree, he worked for a management consulting firm which led him into employment and labor law where he has significant experience defending employers against employment claims. His litigation includes a broad spectrum of areas. He may be reached at at 248-642-3700.

Alexander MassonAlexander Masson is an Associate at Dawda, Mann, Mulcahy & Sadler, PLC. He concentrates his practice in labor and employment, business litigation, real estate development, and corporate law. He may be reached at at 248-642-3700.