By: Preston R. Polk
Employers should be aware that the use of non-compete agreements with employees may soon be banned by the federal government.
The Federal Trade Commission (FTC) announced on January 8, 2023, its proposed Non-Compete Clause Rule. The proposed rule would, among other things, provide that it is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker, to maintain with a worker a non-compete clause, or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.
A non-compete clause is a contractual term between an employer and a worker that typically prevents the worker from working for a competing employer, or starting a competing business, within a certain geographic area and for a period of time after the worker’s employment ends. By their express terms, non-compete clauses limit competition and a worker’s ability to practice their trade. As a result, non-compete clauses between employers and workers have traditionally been subject to scrutiny through state legislation and court precedent.
For example, California and Oklahoma ban the use of non-compete agreements in the employment context, while the majority of states (including Texas) permit such agreements with certain limitations. Indeed, House Bill 1043 filed by Representative Hinojosa has proposed additional limitations under Texas law. Namely, HB 1043 intends to prohibit non-compete clauses for employees earning the lesser of the federal minimum wage or $15.00. Like the proposed rule, HB 1043 still has a few hurdles to cross before becoming law.
Non-compete clauses are also used in other contexts, such as following the sale of a business. The proposed rule would not impact the use of non-compete clauses in this context, unless an employment agreement is entered into as part of such sale, in which case the rule would apply. However, if the person subject to the non-compete owned at least twenty-five percent (25%) of the acquired entity, the rule would not apply.
The proposed rule would make it illegal for an employer to enter into or attempt to enter into a non-compete agreement with a worker, continue to enforce existing non-compete agreement with a worker, or represent to a worker that they are subject to a non-compete agreement. Above all, it would require employers to rescind existing non-compete agreements and actively inform workers that they are no longer in effect. Employers should note that the current notice requirement specifies that employers must provide notice to all affected current and former workers within forty-five (45) days of such recission. Accordingly, employers would need to provide notice to anyone who currently works or did once work for the employer that is subject to a non-compete clause, as the proposed rule defines “worker” as any natural person who works, whether paid or unpaid, for an employer, including employees, independent contractors, interns and volunteers.
There is a sixty (60) day public comment period. Comments must be received on or before March 20, 2023. Following the public comment period, the FTC will promulgate a final rule, which would not be effective until one-hundred eighty (180) days later. Due to the breadth of the ban and the impact it could have on a number of industries, it is possible that changes will be made before the final rule is published. Additionally, litigation may ensue following a challenge to the FTC’s authority to promulgate such a rule.
Cantey Hanger will continue to monitor the proposed rule. If you have questions about this issue, please contact one of the attorneys in Cantey Hanger’s Business Transactions Practice Group.
Preston Polk is a Corporate and Securities associate with the law firm of Cantey Hanger LLP, where he is a member of the firm’s Business Transactions Practice Group. He is a graduate of Baylor Law School and Texas A&M University. Mr. Polk focuses his practice on mergers and acquisitions, corporate finance, securities offerings, and other business transactions. For more information call 817-877-2814 or visit www.canteyhanger.com.
