FTC Proposes Rule Banning Non-Compete Agreements for All Employees
January 12, 2023
By: Adrian P. Castro
On January 5, 2023, the FTC published a proposed notice of rulemaking that seeks to classify almost all non-compete and some non-disclosure agreements as unenforceable forms of unfair competition. While Colorado non-compete laws were recently revised to make it more difficult to enforce non-compete agreements, this new rule would have the effect of rendering the vast majority of Colorado non-compete agreements unenforceable.
According to the FTC, approximately one in every five American workers, which amounts to approximately 30 million workers, are subject to a non-compete agreement restricting their ability to find work with competitors or prospective competitors. Non-compete agreements purportedly prevent workers from leaving their jobs, which decreases competition and results in lower wages for all workers. The FTC also believes non-compete agreements prevent or hinder new business formation, stifle entrepreneurship, and prevent innovation. The FTC asserts the proposed rulemaking would increase worker earnings by $250 billion to $296 billion per year.
The ban proposed would apply to all partnerships, corporations, associations, limited liability companies, or other legal entities that conduct business. The proposed rule defines the term “non-compete” broadly to encompass any contractual term that prevents or restricts a worker from seeking employment, or operating a business, after the conclusion of an employment relationship. The term is defined to include non-disclosure agreements so broadly worded as to inhibit an employee’s ability to work in the same field, and would impact training repayment agreements that lead to the same result.
Under the rule, it would be considered “an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.” Unlike Colorado’s recent amendments, which upheld the enforceability of non-competes entered into under the prior statute, the FTC’s rulemaking would require rescission of all existing non-compete agreements. In essence, all pre-existing non-competes would be rendered void and unenforceable. An employer would need to provide all employees subject to a non-compete with notice of the rescission, with said notice required to take the form of an “individualized communication.” This includes former employees bound by a non-compete.
If enacted, the FTC rulemaking would trump all contradictory state laws. Note the FTC rule would not affect non-compete agreements that arise in non-employment scenarios, such as the sale of a business. Under Colorado law, such non-competes are enforceable if they meet the requirements of Colorado’s non-compete statute. It is presently unknown whether the rulemaking would bar restrictive confidentiality or non-solicitation agreements, or what impact it may have on incentive compensation agreements.
You may review the rulemaking in its entirety here. Public comments will be accepted up to and including March 10, 2023. Notably, the FTC has asked for comment on whether the proposed rule should include a carve-out for highly skilled or highly paid workers, such as senior executives. Colorado expressly enforces non-compete agreements for these categories of workers.
We will keep you apprised of developments concerning the rulemaking. Given the potential impact on the business community, this rulemaking will almost certainly face legal challenges if enacted as written.