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March 2023: FTC Holds Public Forum on Proposed Rule Banning Use of Non-Compete Agreements

08 Mar

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Update Applicable to:
All employers.

What happened?
On January 5, 2023, the Federal Trade Commission proposed a new rule to implement a nationwide ban on using non-compete clauses in employment contracts.

What are the details?
The FTC cites significant evidence that non-compete clauses prevent workers from pursuing better job opportunities by decreasing competition, reducing wages, and inhibiting entrepreneurship. The rule states that an employer may not:

  1. Enter into, or attempt to enter into, new non-compete clauses as of the Compliance Date;
  2. Maintain pre-existing non-compete clauses as of the Compliance Date; and
  3. Represent to workers, under certain circumstances, that the worker is subject to a non-compete.

The FTC believes this will increase employees’ wages by nearly $300 billion per year.

The FTC has cited significant evidence that non-compete agreements are unfair methods of limiting competition and suppressing workers’ wages and entrepreneurism. The proposed rule separates a non-compete clause from other common contractual restrictions such as non-disclosure agreements, confidentiality agreements, and agreements restricting employees from soliciting clients and customers.

Below are some of the proposed changes outlined by the FTC proposed rule of which employers should be aware:

  • A functional test would determine if a contractual term is a non-compete clause.
  • de facto is defined as a broad restriction that precludes workers from working in the same field after their employment with the employer.
  • Any contractual term that includes a de facto non-compete clause must be rescinded.
  • Contractual terms that include unreasonable repayment of training costs upon termination within a given period are considered de facto.
  • Employers must notify current and former employees that their non-compete clauses are no longer in effect within 45 days of rescinding the non-compete clause.
  • The only exception in the proposed rule is for non-compete clauses in the sale of a business, and,
  • The new rule would preempt and supersede any state statute or regulation.

While the proposed rule would not go into effect immediately and is likely to face legal pushback, employers would have 240 days (effective 60 days after publishing in the Federal Register; 180 days after going into effect) to become compliant. The FTC has invited the public to submit comments on the proposed rule.

The public comments are being accepted through March 10, 2023. The FTC will review said comments and make necessary changes.

For more information, please see the links below:

Propose Rule

Article 1Article 2

What do employers need to do?
Employers should review the links provided above and should be on the lookout for any more news regarding this proposed rule. Vensure will continue to update once more information has been received.

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This communication is intended solely for the purpose of conveying information. The present post might incorporate hyperlinks directing readers to websites managed by third-party entities. The inclusion of any links within this communication is meant to serve as points of reference and could encompass opinion articles from various law firms, articles from HR associations, official websites, news releases, and documents of government agencies, and other relevant third-party sources. Vensure has no authority over these external websites and bears no responsibility for their content. Furthermore, Vensure does not endorse the materials present on these websites. The contents of this communication should not be interpreted as legal advice or as a legal standpoint concerning specific facts or scenarios. Nor should it be deemed an exhaustive compilation of facts potentially pertinent to federal, state, or local laws. It is strongly advised that employers solicit legal guidance from an employment attorney when undertaking actions in response to any legal updates provided. This is due to the possibility of future alterations occurring in federal, state, and local laws, regulations, as well as the directives and guidelines issued by governing agencies. These changes may transpire at any given time, potentially rendering certain portions of the content within this update void or inaccurate.

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