On January 5, 2023, the U.S. Federal Trade Commission (FTC) issued a proposed new regulation that would broadly prohibit employers from using or enforcing noncompete agreements with employees, former employees, contractors, or other workers.
Claiming that noncompete agreements are an unfair method of competition that also harms employees, the FTC rule would:
- forbid employers from entering into noncompete agreements or clauses with their workers, including independent contractors;
- rescind existing noncompete agreements or clauses with current workers; and
- require that employers notify their employees subject to noncompete agreements or clauses that those agreements are no longer in effect and may not be enforced.
The proposed FTC rule also includes an expansive definition of what constitutes a noncompete agreement or clause. Importantly, the rule defines a noncompete agreement or clause as any “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”, and any contractual terms that “effectively preclude” employees “from working in the same field” after separation.
The rule does not generally apply to other types of employment restrictions, such as nondisclosure agreements, but this broad definition of noncompete clauses could affect NDAs (Non-Disclosure Agreements) and other employment restrictions if they are broad enough in scope to function as noncompete agreements.
The proposed rule would also “supersede” any state law, regulation, or order that conflicts with its prohibitions on noncompete agreements or clauses. For Michigan employers, the FTC rule, if implemented, would override existing Michigan law that allows noncompete agreements, if such restrictions protect an employer’s “reasonable competitive business interests” and are “reasonable” in “duration, geographical area, and type of employment or line of business …” (MCL 445.774a). The rule would even exceed the requirements of Michigan House Bill 6031, now pending in the State Legislature, which would require employers to disclose their noncompete terms before hiring and prohibit noncompete agreements for low-wage employees (Michigan HB No. 6031).
The proposed rule does include an exception for noncompete agreements related to the sale of a business or a person’s ownership interests in the business, if the person subject to the noncompete agreement is a “substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the noncompete” clause.
The next steps for the proposed FTC rule will be completion of a 60-day comment period, then the FTC will publish a final rule that will be effective 180 days after publication. Given the broad application and effect of the new rule, the rule when issued is likely to be challenged in court, which likely would delay or prevent enforcement.
