FTC proposes a new regulation that kicks noncompetes to the curb

On January 5, 2023, the Federal Trade Commission (FTC) issued a notice of proposed rulemaking that would ban almost all noncompete agreements. Employers will need to act quickly to prepare for this major change.

Overview of proposed rule

The proposed rule bars postemployment noncompetes with “workers” (defined to include independent contractors and others in addition to traditional employees). It applies not only to traditional noncompete agreements, but also to nondisclosure, nonsolicitation, and other covenants that have a similarly limiting effect on workers seeking or accepting employment. Importantly, the rule would apply to all noncompete agreements, including those entered into before the rule’s effective date.

As drafted, the proposed rule contains no exclusions for management, protection of trade secrets, or other exemptions that state laws currently provide. The sale of business exception is preserved to some extent, but only if the seller holds a 25% or greater share of the company’s equity—a high threshold that could effectively do away with many sale-of-business noncompetes currently in place.

If the proposed rule is adopted, companies would be required to provide notice to both current and former employees to notify them that their noncompetes are no longer in effect and may not be enforced against them.

After the rule is published in the Federal Register, it will be subject to comment for a period of 60 days.

FTC’s authority may be challenged