January 6, 2023

Federal Trade Commission Proposes to Abolish Non-Compete Agreements

On January 5, 2023, the Federal Trade Commission proposed a new rule that would prohibit employers from imposing non-compete agreements on their employees and independent contractors. A non-compete clause contractually prevents a worker from competing against an employer, usually within a specified geographic area and period of time after the work relationship with the employer has ended. California already prohibits the use of non-compete agreements in most circumstances, so if the proposed rule is adopted it will have little effect in this state.

The proposed rule is based on the FTC’s preliminary finding that non-competes constitute an unfair method of competition, thereby violating Section 5 of the Federal Trade Commission Act. In a press release announcing the proposed rule, FTC Chair Lina M. Khan said: “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy. Non-competes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

The FTC’s proposed rule would bar employers from: entering into non-compete agreements with workers; keeping existing non-compete agreements with workers; or advising workers under most circumstances that they are subject to non-compete provisions.

Employers would also be required to rescind existing non-competes and inform workers of such rescission.

Certain other employment restrictions, like non-disclosure agreements, would not be barred by the proposed rule, unless so broad in scope that they in effect function as non-competes.

The public will have the opportunity to comment on the proposed rule for 60 days after the Federal Register publishes it. The FTC may then make changes in a final rule. The FTC specifically seeks comment on whether franchisees and senior executives should be covered by the rule, and whether low-and high-wage workers should be treated differently.

For more information, please reach out to William Ross in the Los Angeles office of Hirschfeld Kraemer LLP, wross@hkemploymentlaw.com, or (310) 255-1828.

Category: Contracts,