Approximately 30 million people, or 1 in 5 workers, are subject to a non-compete clause, but that could change.
The Federal Trade Commission (“FTC”), in response to an executive order, has proposed a rule preventing employers from entering into non-compete clauses with workers and requiring employers to rescind existing non-compete clauses invalidating existing non-compete provisions and prohibiting employers from using them in future agreements (“the “Proposed Rule”). Further, the Proposed Rule expands the application of the regulation by providing a broadly defined definition of “workers”.
Who is a “Worker”
The Proposed Rule defines “workers” to include “a natural person who works, whether paid or unpaid, for an employer” including, without limitation, “an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.”
Prohibition of De Facto Non-Competes
Any provision, whether identified as a non-compete provision or not, 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 employment with the employer.”
Transactional Non-Compete Exception
The Proposed Rule does not apply in circumstances when a business is sold (asset or equity) and an employee is a “substantial owner” at the time the provision is entered into.
An owner is “substantial” if he or she “holds at least a 25 percent ownership interest” in the business entity.
What Does an Employer Need to Do if the Proposed Rule becomes Effective?
If adopted as proposed, employers must provide notices to impacted “workers” notifying them that their non-compete provision is no longer effective.
State Preemption
The Proposed Rule will control over state law in any jurisdiction where state law conflicts with it or a less stringent restriction is provided by state law.
It is very likely that the Proposed Rule will be challenged legally by interested parties, making its effective date as well as whether it will survive such legal challenges hard to determine at the present time.
The comment period recently concluded, and the FTC is in the mandatory 180-day notice period that follows the comment period, the rule cannot go into effect any earlier than mid-October of this year. With that said, the FTC received nearly 27,000 comments on the Proposed Rule and there is speculation that the FTC will vote on the Proposed Rule in 2024. However, the FTC may reopen the comment period, issue a new proposed rule, terminate its rulemaking, or move on to a final rule.
If you have questions about a non-compete or any other legal matters for your business Lipresti Law is here for you. Please visit us at LiprestiLaw.com or contact us at 617-351-4745.