On January 5th the Federal Trade Commission (FTC) issued a proposed rule that would ban noncompete agreements between employers and their workers in most circumstances. While the proposed rule will almost certainly be met with legal challenges and ultimately get resolved in the courts, let’s take a look at what you need to know now.
The proposed rule would make it illegal for an employer to enter into or attempt to enter into a noncompete with a worker.
The proposed rule covers all employers.
“Worker” is broadly defined as a natural person who works, whether paid or unpaid, for an employer and specifically includes independent contractors.
Existing noncompete agreements are covered by the ban. Employers must rescind the noncompete by the “compliance date” and are required to notify the worker of the rescission. The compliance date is 180 days after publication of the final rule in the Federal Register, which has not yet occurred.
The FTC has published model language that can be used to communicate the rescission.
The proposed rule makes no mention of non-solicitation agreements. It does, however, specifically state that a non-disclosure agreement that is so broad that it effectively precludes the worker from working in the same field is prohibited, as is an agreement to repay training costs if the worker’s employment terminates within a specified period if the required repayment is not reasonably related to the costs incurred for training.
Presumably, a narrowly tailored agreement that prohibits the solicitation of customers, the solicitation/recruiting of employees and the disclosure of trade secrets and confidential information will still be valid.
A noncompete entered into as part of a sale of business (asset or stock/ownership interest sale) is allowed provided that the individual being asked to sign the noncompete owns at least 25% of the entity being sold.
Although the proposed rule is not yet in effect and will likely be resolved in the courts, there are certain steps employers should take now.
First, if you are asking lower wage or lower level workers to sign noncompete agreements, stop. Those are most likely not enforceable under the applicable state law now, and are even less likely to survive the final outcome of the FTC’s proposed rule.
Second, ask yourself if a non-solicitation and nondisclosure agreement will give you the protection you need. If so, use that instead of a noncompete, as that will likely be enforceable.
Finally, review your existing noncompete, nonsolicit and nondisclosure agreements to see if these comply with applicable state law and if there is adequate protection in the event the noncompete is banned. If not, or if you need assistance, please contact us or call your attorney.