FTC Proposes Rule to Ban Non-Compete Clauses
On Thursday, January 5, 2023, the Federal Trade Commission (“FTC”), which enforces antitrust law, proposed a rule that would prohibit employers from imposing non-compete clauses on workers. This proposed rule, which can be found here, could impact more than 30 million workers nationally and carries important implications for Florida’s business community.
A non-compete clause is a contractual clause between an employer and a worker that prevents the worker from joining a competing employer, or starting a competing business, typically with geographic and time-based parameters.
The FTC is an independent agency charged with enforcing civil antitrust law and promoting consumer protection. Its notice of proposed rulemaking is based on the agency’s initial finding that non-compete clauses violate Section 5 of the FTC Act, which prohibits unfair methods of competition.
Specifically, the FTC alleges that non-compete clauses block workers from freely changing jobs, depriving them of higher wages and improved working conditions, and stifles business innovation, particularly for start-up companies. The following are key takeaways from the proposed rule:
- Broad Prohibition of Non-Competes. The rule would make it illegal for companies to enter into non-compete contracts with workers or continue to enforce such contracts if they already exist. This prohibition extends to all workers, including independent contractors.
- Notice Requirement. The rule would require companies with active non-compete clauses to provide notice to workers that the clauses are no longer in effect.
- Exclusion of NDAs, Non-Solicitation Agreements, and Trade Secret Law. The rule would not apply to other types of employment restrictions, such as non-disclosure agreements (“NDAs”) and client or customer non-solicitation agreements, so long as these restrictions do not prevent a worker from accepting employment with a person elsewhere or operating a separate business. Employers also remain able to bring claims against current or former employees for violation of federal or state trade secret laws.
- 25% Ownership Exception. The rule would include a limited exception for non-compete clauses between the seller and buyer of a business. This exception would only be available where the party restricted by the non-compete clause is an owner, member, or partner holding at least a 25% ownership interest in the selling of a business entity, and remains subject to federal antitrust laws.
- Additional Topics To Be Considered. The rule seeks public comment on a number of topics, including: (1) whether franchisees should be covered by the rule; (2) whether senior executives should be exempted from the rule, or subject to a rebuttable presumption rather than a ban; and (3) whether low- and high-wage workers should be treated differently under the rule.
In Florida, non-compete clauses are legally enforceable and deemed valid restraints on trade as long as all legal requirements are met. These clauses are widely used across industry sectors and are regularly included in employment agreements, particularly with highly compensated senior executives. If the proposed rule were to go into effect as drafted, it would challenge existing Florida Statutes and established precedent in Florida courts and impact the way Florida businesses craft employment agreements.
The FTC will seek public comments for two months and the rule will take effect six months after a final version is published. If implemented, a final rule may not be in place until at least 2024. Any final rule is expected to be subject to future legal challenges, especially given the broad nature of the initial notice of proposed rule.