by Matthew Allison, Corporate Associate
On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a new rule that could have a major ripple effect on a fairly common business practice. The FTC is currently seeking public comment to its proposed ban on an employer’s use of contractual noncompete clauses with employees. A noncompete is a contractual provision in an agreement between an employer and employee in which the employee agrees not to work for a competing employer or commence a business that would be in competition with its employer. The limitations of a noncompete are normally only for a certain time period after the employee’s employment ends and typically only covers a particular geographic territory in which the noncompete would apply.
In proposing this new rule, the FTC is aiming to define the term of “noncompete clause” to include any contractual obligation that “has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the work’s employment with the employer.” Depending on how this language would be interpreted in the future, the ban could cover a wide range of these contractual provisions.
The proposed rule would not only apply to employees of an employer, but also to any independent contractors contracted to perform services for the employer. If the proposed rule takes effect as recommended by the FTC, it would not only be illegal to enter into a noncompete with an employee and/or independent contractor, but it would also be illegal to uphold any current noncompete provisions with an employee that are already in place or for the employer to represent to the worker that they are subject to any type of restrictions that would function as a noncompete.
The FTC has provided one primary carveout to the proposed rule. The FTC would allow a noncompete contractual provision in connection with a sale of a business; however, the carveout would only apply to a “substantial owner, substantial member or substantial partner.” The term “substantial”, as defined in the FTC’s proposed rule, would apply to an individual that holds over twenty-five percent (25%) of the ownership in interest in the company.
The enforceability of a noncompete is normally governed by state law. If the proposed rule is affected, it will most certainly ignite a debate on the FTC’s scope of authority to enact such a rule against a noncompete and is likely to be argued and decided in the courts.
Questions on how this may impact you or your business?
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