Compliance Alert: Considering the Federal Government's Recent Shift to Ban Non-Competes

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In recent months, the federal government has sought to prohibit noncompetition clauses (non-competes) in independent contractor and employment agreements. It is estimated that 30 million workers would be impacted by the federal government’s new interpretation of longstanding laws. As such, compliance and regulatory advisers should reconsider how to counsel clients with respect to non-competes, which starts with understanding the current thinking of the two federal agencies seeking to broadly ban non-competes in the United States.

On July 9, 2021, the Biden Administration issued an executive order on promoting competition in the American economy, which encouraged federal agencies to “curtail the unfair use of non-compete clauses” that “may unfairly limit worker mobility.” Federal agencies then began taking steps to prohibit non-competes in employment agreements.

First, on Jan. 5, 2023, the Federal Trade Commission (FTC) published a proposed rule that broadly bans non-competes in independent contractor and employment agreements. Second, the National Labor Relations Board (NLRB) announced in a memo on May 30, 2023 that non-competes in employment agreements violate the National Labor Relations Act (NLRA) except in limited circumstances. To avoid violating the FTC’s proposed rule, employers generally must create workplace policies and procedures that:

1. Prevent employers from forcing (or attempting to force) employees into entering into non-competes.
2. Prevent employers from implying that employees are subject to non-competes.
3. Ensure that adequate and timely notice is provided to employees on rescinding the non-competes.
4. Guarantee that the new policies apply to all employees, independent contractors, and anyone who works for an employer, whether they are paid or unpaid (e.g., externs, interns, volunteers, apprentices, etc.).

The FTC rule may also apply to nondisclosure, training repayment or non-solicitation agreements that are so broad that they functionally block a worker from working anywhere else in their field. The only exception to the proposed rule is a non-compete used in the sale of a business or between franchisors and their franchisees. Members of the public had until April 19, 2023, to submit comments on the proposed rule. The FTC has almost 27,000 comments to review and may revise the rule before making it final; therefore, it may be later this year before a final rule is published.

While the FTC’s proposed rule applies to all workers, the NLRB’s memo prohibits non-competes in employment agreements only. The NLRB’s position is that non-competes directed to low-wage and middle-wage workers are overly broad and violate the NLRA. There are exceptions for non-competes that are “narrowly tailored to special circumstances justifying the infringement on employee rights” or restrict only a management or ownership interest in a competing business. However, the memo indicates that these exceptions do not apply to:

1. Agreements based only on a desire to avoid competition from former employees
2. Agreements based merely on business interests in retaining employees
3. Agreements based on protecting special investments in training employees

The key take-aways: employers should consider removing non-competes from all current employment agreement forms; avoid using non-competes with lower wage and middle wage workers; only require employees who possess true protectable interests to sign them; and stay up to date on the ongoing changes to the federal regulations to ensure compliance.

Mitch Surface is a 2021 graduate of Cumberland School of Law's joint J.D./LL.M. program where he concentrated in health law and compliance.