Update on the FTC’s Proposed Limits on Non-Competes – What Can Employers Do to Prepare?
The Federal Trade Commission (FTC) issued notice Jan. 5 of its intent to exercise its authority to ban non-compete clauses between employers and their workers. We previously reported on this significant employment development on Jan. 6 and Jan. 9.
In this article, we will discuss several notable takeaways from the proposed rule.
On Jan. 18, the FTC issued its proposed rule that would ban most non-compete clauses. The proposed rule contains detailed arguments by the FTC explaining its reasoning and analysis in reaching the conclusion that a categorical ban on non-compete clauses would remedy what it found to be numerous adverse effects of those clauses on competition in the labor, product, and service markets. The proposed rule also contains more explanation from the FTC about the specific provisions of its proposed ban, which we addressed in our previous reports.
FTC suggested several alternatives to a categorical ban on non-compete clauses.
Despite initially announcing the intention to implement a categorial ban on non-compete clauses, the FTC acknowledged in its proposed rule that “several alternatives to a categorical ban may also accomplish the objectives of the proposed rule to some degree.” The FTC further explained that these alternatives flow from two key questions:
(1) Whether the rule should impose a categorical ban on non-compete clauses or a rebuttable presumption of unlawfulness?
(2) Whether the rule should apply uniformly to all workers or whether there should be exemptions or different standards for different categories of workers?
After discussing in depth several alternatives and noting the possibilities are “nearly limitless,” the FTC described four specific alternatives to the proposed ban and invited public comment on them:
1. A categorical ban on non-compete clauses for some workers but a rebuttable presumption of unlawfulness for other workers.
Under this alternative, the ban on non-compete clauses would apply only to some workers, based on their job function, occupation, earnings, some other factor, or a combination of factors. Possible examples the FTC discussed could be a ban only on all workers other than “senior executives” or only on those workers whose job duties meet the FLSA overtime exemptions of “executives” or “learned professionals.” (The FTC also invited comment on how to define a “senior executive.”)
As to workers not subject to the outright ban under this alternative, there would be a rebuttable presumption that any non-compete clauses they entered into would be unlawful unless the employer could satisfy a certain evidentiary burden. For example, a non-compete clause for a “senior executive” would be enforceable only if the employer satisfied the evidentiary burden.
One evidentiary burden suggested by the FTC under this approach would permit an employer to rebut the presumption of unlawfulness if the employer “shows by clear and convincing evidence that the non-compete clause is unlikely to harm competition in labor markets or product or service markets, or identify some competitive benefit that possibly outweighs the apparent or anticipated harm.” The FTC also suggested the test could focus exclusively on either of the two foregoing prongs. And, alternatively, a lesser evidentiary standard such as “preponderance of the evidence” could be used.
The FTC did stress in discussing a “rebuttable presumption” alternative that any evidentiary burden that might be incorporated into any such approach included in the final rule would be more restrictive than the current common-law standard, i.e., that non-compete clauses are permitted if the employer can identify legitimate business interests and if the non-compete clauses are reasonable with respect to geographic area, duration, and the scope of activity prohibited. The agency also suggested that it could specifically define in the final rule the term “legitimate business interest” to be used under this alternative.
2. A categorical ban on non-complete clauses below a certain income threshold, with no ban above that threshold.
Like the first alternative, under this option, the ban on non-compete clauses would only apply to workers earning below a certain annual income threshold level, such as only those earning less than $100,000 a year. Employers could enter into enforceable non-compete clauses with workers earning higher than the specified annual income level. One reasoning for this alternative is that typically employers have a more legitimate, protectable interest in preventing higher-earning workers, who often are in management or high-earning sales positions, from leaving and competing against them.
3. A rebuttable presumption of unlawfulness to non-compete clauses for all workers.
Under this alternative, there would not be a categorical ban on non-compete clauses. Instead, a rebuttable presumption of unlawfulness would apply that employers could overcome if they met the specific evidentiary burden. One issue with this approach identified by the FTC is that it could create confusion and uncertainty between employers and workers over whether a specific non-compete clause is enforceable.
4. A rebuttable presumption of unlawfulness to non-compete clauses for workers below a certain income threshold, with no requirements above that threshold.
The final alternative suggested by the FTC is a mix of the other three. Under this approach, there would be no limitations on the enforceability of non-compete clauses as to workers earning above a certain annual income threshold. But for workers earning less than the threshold, the enforceability of non-compete clauses would be subject to a rebuttable presumption test.
The FTC also suggested the final rule could include new disclosure and reporting requirements on employers related to non-compete clauses.
The FTC suggested two other alternatives to a categorical ban on non-compete clauses and sought comment on them. First, the agency discussed requiring employers to disclose to a worker, before making an employment offer, that the worker will be subject to a non-compete clause. Second, the agency suggested it could impose a rule requiring employers to submit a copy of all non-compete clauses to the FTC. It is possible that the final rule could include one or more of these requirements, along with limitations on the enforceability of non-compete clauses.
What are the main takeaways for employers? What can they do now to prepare?
The main takeaway from the FTC’s proposed rule is that its detailed discussion of alternatives suggests at least the possibility that the final rule will not include a categorical ban on non-compete clauses. Nonetheless, it is clear the FTC intends to limit non-compete clauses, and this has been a stated priority of President Biden. Therefore, employers should expect the final rule will include at least some limitations on the enforceability of these clauses.
As noted, the FTC is asking for comments from the public to its proposed rule. An employer may submit a comment online here. Comments must be received by March 20.
Additionally, for interested employers, the FTC will host a virtual public forum on Thursday, Feb. 16, from noon to 3 p.m. EST.
Finally, any final rule that bans or limits the enforceability of non-compete clauses will not take effect until 180 days after the rule is published. It is also expected that legal actions will be filed to prevent the final rule from going forward and challenge the FTC’s authority on this subject area. So, there is still plenty of time for employers to prepare.
Employers should continue to use the time before the final rule is published to carefully review their existing non-compete clauses, as well as confidentiality and non-solicitation clauses, and consult with legal counsel to ensure their employment agreements comply with existing, applicable law and are narrowly tailored (both in scope and application to workers) to protect their business interests. Employers also should use this time to consider and discuss with counsel options other than non-compete clauses that might protect their business interests, in the event the final rule includes a categorical ban.
Please contact Michael E. Turner or any member of Phelps’ Labor and Employment team with questions or for advice and guidance.
