On January 5, 2023, the Federal Trade Commission published a proposed rule that would ban (and importantly, nullify existing) non-compete agreements with limited exceptions. The rule would go into effect 60-days after it becomes final. Employers would have 180-days after publication of the final rule to comply.
Under the proposed rule, a “non-compete clause” includes 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.” This broad language could also impact contractual terms that are not traditionally understood as express “non-compete” agreements. The proposed rule includes a “functional test for whether a contractual term is a non-compete clause.” Under the “functional test,” the clause would be evaluated to determine whether it ”has the effect of prohibiting 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.”
Importantly, this rule would also require existing non-compete clauses/agreements to be “rescind[ed] . . . “no later than . . . the compliance date.” To complete rescission, the employer must provide written notice to both existing and former employees bound by a non-compete clause.
This proposal comes on the heels of scrutiny of non-compete agreements by the current administration. Employers and businesses should be aware of the current tide against non-compete clauses and look at the current language contained in any existing agreements that may be deemed broad enough to fall under the targeted umbrella of non-compete clauses.