FTC Issues "Comprehensive Ban" on Non-Compete Clauses
Commentary by Neely Agin and Robin Adelstein
The FTC issued a rule to ban non-compete clauses for employees. The final rule provides that "it is an unfair method of competition—and therefore a violation of Section 5 of the FTC Act—for employers to enter into non-compete agreements with workers." (See, Norton Rose Fulbright Memorandum.)
The final rule adopts a different approach for senior executives than for other workers. For senior executives, existing non-compete agreements can remain in force "because this subset of workers is less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers ... and because commenters raised credible concerns about the practical impacts of extinguishing existing non-competes for senior executives." The final rule defines the term "senior executive" to refer to workers earning more than $151,164 annually who are in a "policy-making position."
The FTC stated that existing non-compete agreements with workers other than senior executives are not enforceable after the effective date of the final rule, (noting that fewer than 1% of workers are estimated to be senior executives under the final rule.)
The rule does not ban so-called "garden leave" arrangements. The adopting release (at page 83) states that "an agreement whereby the worker is still employed and receiving the same total annual compensation and benefits on a pro rata basis would not be a non-compete clause under the definition, because such an agreement is not an employment restriction."
This rule becomes effective 120 days after publication in the Federal Register.
Commentary
The FTC’s new rule, as well as other recent measures seeking to eliminate restrictions on labor by both the FTC and DOJ, have left companies weighing how to navigate employee contracts and whether to continue using non-competes, and if so, in what circumstances. Although the rule already is being challenged in court, companies should begin evaluating what the rule will mean for their employment contracts and how to effectively protect their information in the event the ban is implemented.
Commentary
Setting aside the party-line vote and the impending challenge to the rule, it is clear that competition enforcement issues impacting labor markets remain a priority of the Commission. Both Commissioners Slaughter and Bedoya highlighted their interest in investigating competition issues in the franchise industry and not-for-profit healthcare sector, as well as challenging no-poach agreements among employers under the antitrust laws.
Related Articles
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The FTC extended the comment period on a proposed rule banning employers from subjecting their employees to noncompete clauses. The extension is from March 20 until April 19, 2023.
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House Republicans criticized the FTC rulemaking proposal to ban noncompete clauses, asserting that the proposal "exceeds its delegated authority and imposes a top-down, one-size-fits-all approach that violates basic American principles of federalism and free markets."
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FTC proposed the "Non-Compete Clause Rule," which would prohibit employers from (i) entering into, or attempting to enter into a non-compete clause and (ii) representing to employees that they are subject to a non-compete clause.
