This month the United States’ Federal Trade Commission proposed a rule which would prohibit employers from using Non-Competition Agreements with employees and independent contractors. The rule, if enacted, will apply nationwide. The proposed rule will also require employers to rescind all current Non-Competition Agreements in effect with employees and independent contractors.
The proposed rule broadly defines non-compete agreements as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”
The FTC’s rule would implement a “functional test” for determining whether an agreement constitutes a non-compete agreement. According to the Commission, a de facto non-compete agreement would be a contractual term which “has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.” Thus, this definition may cover not only traditional non-compete agreements that prohibit employees from engaging in competitive activity after their employment is terminated, but may also overlap into broadly written non-disclosure agreements and non-solicitation agreements.
The FTC’s proposed rule, however, does not prohibit non-competition agreements in the context of an individual either selling their business or selling their ownership interest in a business. In such situations the prospective buyer could require the seller to execute a non-compete agreement. Such an agreement would not violate the FTC’s rule.
The FTC’s rule comment period will now last 60 days. After this timeframe passes, the FTC’s rule could take effect and require employers to comply as soon as 180 days thereafter.
Non-competition agreements are routinely and widely used by employers. The FTC’s proposed rule is a hot button topic that, if passed, will immediately be challenged in courts across the country.
This article is for information purposes only and is not intended to constitute legal advice.