In January 2023, the Federal Trade Commission (FTC) issued a proposed rule to ban the use of non-compete clauses in employment agreements. The rule follows President Biden’s July 9, 2021, executive order encouraging the FTC to engage in rulemaking restricting the “unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” The FTC invites the public to comment by March 20, 2023. In this blog, we discuss important considerations related to the FTC’s proposed nationwide ban on non-compete agreements and potential implications for government contractors and their ability to retain staff and safeguard confidential information connected to federal contracts.
Summary of the Proposed Rule
The proposed rule would make non-compete clauses unlawful across all 50 states. The rule defines non-compete agreements broadly as any term that “prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment.” Companies that have current non-compete agreements with employees would be required to rescind those agreements. The FTC argues that such non-competes limit competition, and that this move will significantly improve workers’ wages, allow for increased worker mobility, and increase innovation through the movement of talented and knowledgeable workers in the labor market.
The rule also bans “de facto” non-competes, i.e., contractual terms that may lead to the same result as a non-compete, such as a broadly drafted non-disclosure agreement, or certain types of retention provisions that may trigger penalties upon an employee’s early termination.
There is a narrow exception for non-competes related to the sale of a business, which historically was treated as an exception for state and common law restrictions on non-compete agreements. While the rule does not explicitly exclude customer non-solicitations—provisions that limit employees from soliciting certain company customers—FTC guidance indicates that such agreements fall outside the rule’s definition of a non-compete since they don’t technically limit a worker’s employment, but instead limit the types of customers they can pursue.
This move could present considerable challenges for government contractors in an industry where confidential information and key personnel are often critical to a contractor’s success. For example, non-competes often serve as a powerful tool to keep key personnel employed during a recompete bid. Without such agreements in place, it’s not hard to imagine a contractor poaching key personnel or proposal writers. Further, whereas non-disclosure agreements can be difficult to enforce (it’s not always apparent that someone shared pricing data with a competitor), non-competes often present a cleaner way to prevent the spread of such information. These considerations are magnified for small businesses that may not have the resources to defend against a larger contractor’s targeted strike.
What Government Contractors Should Do to Prepare for the Ban on Non-Compete Agreements
Remember, as of now, the rule is still just a “proposed rule.” This means we still don’t know which aspects of the rule, if any, will proceed to final rulemaking. Further, even if a final rule is issued, it is certain to face legal challenges given the FTC’s unprecedented action. This means that, at least for the time being, a nationwide non-compete ban is still quite far off.
That said, the FTC’s actions are part of a larger trend. Non-competes have come under scrutiny in recent years with a number of states limiting, or in certain cases, completely banning the use of such agreements. For example, Maryland and Virginia recently imposed bans on the use of such agreements for low-wage employees. Other states, such as Washington, legislated strict pre-employment notice requirements.
As always, companies should regularly review their current employment agreements to ensure that any restrictive covenant provisions are narrowly tailored and otherwise in compliance with evolving state law. In states that already restrict the use of such agreements, there are often alternative ways to protect the company’s confidential and proprietary information. In many cases, entering into no-poaching agreements with business partners may be a suitable alternative to an employee non-compete.
If you need any assistance navigating questions about employee non-compete agreements, or if you would like to discuss the FTC’s proposed rule, please contact Sarah Nash or Kirby Rousseau, the authors of this blog, or another member of PilieroMazza’s Labor & Employment Group.