The Federal Trade Commission (“FTC”) yesterday proposed a federal rule that would prohibit companies from making or enforcing non-competition clauses with their workers. If implemented, this rule would have a significant impact on businesses and employees across the country.
In its Notice of Proposed Rulemaking, the FTC proposed a rule that would classify non-competition clauses in employment agreements as a form of unfair competition. Non-competition clauses are often included in employment agreements in business sectors of all types as a means of preventing employees from working for competitors after employment. In Wisconsin, though these clauses are “disfavored” by law and can be difficult to enforce at times, they are legal and not uncommon. If implemented, the rule would pre-empt state law and prohibit employers from using these clauses.
What Does (and Doesn’t) the Proposed Rule Prohibit?
The proposed rule would generally prohibit employers from:
- entering into employment agreements with workers that contain non-compete clauses;
- maintaining employment agreements with workers that contain non-compete clauses; and
- representing to workers that they are bound by non-compete clauses that are actually unenforceable.
The proposed rule DOES NOT prohibit non-compete clauses with individuals who have a 25% or greater ownership interest in the entity, when that person is selling their ownership interest in the entity or selling substantially all of the entity’s assets.
The proposed rule also does not prohibit employers from having non-competes with employees that apply only to competition during their employment, rather than after their employment ends.
What Action Would the Proposed Rule Require Employers to Take?
The proposed rule would require employers to rescind any non-competition clauses that would otherwise be in effect and to give notice to current and former employees of the fact their non-competes have been rescinded, though notice to former employees would only be required to be given if the employer has the former employee’s contact information “readily available.” This notice would need to be an “individualized” communication to each applicable employee and former employee, given in paper or digital format within 45 days of the non-compete being rescinded.
Is This Proposed Rule Actually Going to Take Effect?
At this point, this rule is only proposed and is not in effect. However, President Biden has made it known that he supports a rule of this nature, and the FTC is currently run by a Democratic majority. It seems likely, in our opinion, that some version of this rule could ultimately take effect.
What Timeline Are We Looking At?
The public will have 60 days to comment on the proposed rule. At that point, the FTC will review the comments and develop a final rule that takes those comments into account. The timeframe for the FTC’s review of comments and development of a final rule is difficult to predict but would likely take at least several months. Once the FTC publishes the final rule, it will likely have an effective date of 60 days after publication. Given all of this, we are unlikely to see this rule, assuming it becomes final, in effect for at least six months.
What Should My Business Do Now?
We recommend that businesses take stock of all non-competition clauses they currently have in effect, for current and past employees, and create a list of those clauses, employees, and employee contact information. This will make it easier to provide timely notification to employees in the future, should this proposed rule go into effect.
In the meantime, employers can continue to include non-competes in employment agreements, keeping in mind that it is unlikely they will be enforceable in the long term.
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