January 09, 2023 | Legal News
FTC Proposes Ban on Employer Non-Competes
On January 5th, the FTC issued a proposed “Non-Compete Clause Rule” under its authority to regulate “unfair competition” that would ban all post-term non-compete agreements between companies and their workers, including employees and independent contractors. This action triggers a 60-day public comment period, ending March 6th, after which the FTC may enact the rule in its current or some modified form.
As proposed, the rule would make it unlawful for employers to execute new non-compete agreements or to maintain preexisting ones, and employers would need to rescind existing agreements and inform workers that such agreements are no longer in effect. Problematically, the rule defines non-compete agreements broadly to include agreements that are deemed to “effectively” prohibit a worker from working in the same field, including non-disclosure or other agreements designed to protect the employer’s confidential information.
While the rule applies to franchisors’ and franchisees’ workers, at least for now franchisees themselves are carved out. But the FTC has explicitly requested public comment on whether the rule should be expanded to include franchisees. At the same time, the FTC is also considering whether to make the final rule less stringent, such as by adding additional carveouts for high-level employees or by simply creating a rebuttable presumption of an agreement’s invalidity.
After the March 6th comment period, the FTC can request additional comments, abandon the proposed rule, or enact it in its current or modified form. If enacted, the final rule would be enforced by the FTC but would not create a private right of action for workers themselves to sue. If enacted, the rule requires employers to comply within 180 days.
Even if the FTC’s proposed rule continues to carve out the non-compete obligations of franchisees in its final form, its broad scope may still impact the franchise industry. The prohibition may impact franchisors and franchisees as to their ability to train and retain management level employees as well as their ability to protect certain confidential information. Franchisors who use non-compete agreements with their employees, contractors, and agents—as well as those who require non-competes from franchisees and key employees with confidential information—should consider submitting comments prior to the March 6th deadline.