Understanding the FTC’s Proposed Rule to Ban Noncompete Clauses

The Federal Trade Commission (FTC) has recently proposed a rule that could potentially ban noncompete clauses in employment contracts.  This article aims to address some of the most frequently asked questions about this proposed rule and its implications for employers, workers, and existing state laws.

Overview of the Proposed Rule

The FTC’s proposed rule seeks to render unenforceable all contractual agreements that functionally prevent a worker from seeking or accepting employment with another person, or operating a business, after their employment with the employer has ended. The determination of whether an agreement falls under this category would be based on a functionality test. The FTC is exercising its authority to propose this rule based on its power to prevent the use of unfair methods of competition in or affecting commerce.

Timeline for Implementation

Currently, the FTC is in the proposed rulemaking stage. If the rule is finalized, it would become effective 60 days after its publication. Additionally, there would be a compliance date 180 days after publication in the Federal Register. Employers with noncompete agreements already in place would need to provide notices to affected workers within 45 days of the effective date, informing them that the noncompete portion is no longer enforceable.

Impact on Other Restrictive Covenants

The proposed rule explicitly states that other restrictive covenants that limit a worker after the end of their employment will generally not be included, unless they restrict future employment. This means that non-solicitation agreements, no-poach agreements, nondisclosure agreements, and other similar agreements may still be permissible under the rule. 

However, the rule aims to render all de facto noncompete agreements moot, regardless of their label. This could potentially extend to other contractual provisions if they are drafted broadly, such as non-solicit and nondisclosure agreements.

Effect on State Laws

Most states currently have individual laws governing noncompete agreements, addressing aspects like duration, geographic scope, or implementing an outright ban (e.g., California). If the proposed rule is finalized and survives legal challenges, it would preempt all state laws affecting noncompete agreements. 

To ensure compliance with existing state and local laws, it is crucial to familiarize yourself with the relevant statutes and seek trusted counsel.

Stay Informed On Future Changes

The FTC’s proposed rule to ban noncompete clauses could significantly impact the world of work and the workplace. As a result, the FTC is seeking public input on the consequences and alternatives of this rule. Employers and workers alike should stay informed about the rule’s progress and potential implications for their contractual agreements. Consulting with local counsel for specific compliance questions is highly recommended.

As the rule is still in the proposed stage, it is essential for all stakeholders to be aware of any changes or updates to the rulemaking process. Keep an eye on the FTC’s website and announcements to stay informed and prepare for potential changes to noncompete agreements in the future.

If you’re an executive seeking guidance on employment agreements or navigating the complexities of noncompete clauses, don’t hesitate to take action. Contact Holly Hammer at Hammer Law PLLC today to safeguard your professional interests and ensure you’re well-equipped to face any changes in the legal landscape.