Federal government proposes ban on non-compete agreements

On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that would restrict the use of non-compete clauses in employment contracts. Non-compete clauses are intended to prohibit employees from working for competitors of their current employer for a certain period of time after leaving their job. According to the overview of the proposed rule, about one in five US workers are bound by a non-compete clause and are restricted from pursuing better employment opportunities or new business opportunities. Ultimately, the rule is intended to increase competition for workers and improve workers’ earnings.

In the US, non-compete agreements are governed by state law, and many states have enacted specific statutes about the use of non-compete agreements. Additionally, all state courts have issued decisions on the extent of non-compete clause enforceability to try and balance the employer’s need to protect key client relationships and confidential information against the employee’s ability to pursue opportunities for gainful employment. If the proposed FTC rule is enacted, it will ban most non-compete agreements going forward and almost all existing non-compete agreements would be rescinded immediately. This will have a significant impact on businesses and employees currently working under non-compete agreements. Firms contemplating mergers and acquisitions will also have to reevaluate the business opportunities if the scope of non-compete agreements with the staff of the target company are restricted. It is widely expected that if the FTC pushes ahead with a final rule that it will be challenged in court.

All interested parties can still provide feedback to the FTC. On March 6, the FTC voted to extend the public comment period for its proposed new rule until April 19, 2023. The American Council of Engineering Companies (ACEC) is also preparing a response to the FTC on behalf of its firms. ACEC member firms can contact ACEC Government Affairs to provide feedback.

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