FTC Proposes Rule to Prohibit Worker Non-Competes

By Jed Weiner

On January 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking (“Proposed Rule”) to prohibit employers nationwide from entering into non-competes with workers, including independent contractors. Non-competes would be designated as “unfair methods of competition” under the FTC Act. The rule would apply retroactively.

The Proposed Rule would upend customary practice in the United States in employment and independent contractor agreements of restricting employees and contractors from working for competing employers, or starting a competing business, typically within a certain geographic area and period of time after the worker's employment ends.

As an exception to the no-compete ban, the Proposed Rule would permit non-compete agreements in connection with M&A transactions for substantial owners selling the business or substantially all of its assets or all of the owner’s ownership interests.

Currently non-compete clauses are governed by state law. The Proposed Rule would override state laws permitting non-compete clauses. California, North Dakota and Oklahoma are the only states that currently ban non-compete clauses.

The Proposed Rule is subject to a 60-day comment period and may be subject to legal challenge.