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On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that, if enacted, would ban employers’ use of non-compete agreements under most circumstances. It would also require employers to rescind all existing non-compete agreements and provide written notice of recission to all current and former workers bound by non-compete agreements.

The proposed rule would prevent employers from entering into any agreement that explicitly prohibits a worker “from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” The proposed rule would also bar any other broadly written agreements that amount to a “de facto” non-compete agreement. The proposed rule would not apply only to employees, but also to other work arrangements such as independent contractors, interns, volunteers, and sole proprietors who provide “a service to a client or customer.” The proposed rule provides an exemption for certain non-compete agreements entered in connection with the sale of businesses.

The enforcement of non-compete agreements is currently a matter of state law, and states vary in how they treat such agreements. As drafted, the proposed rule would supersede all state laws, regulations, orders, and interpretations that are not consistent with the requirements discussed above. States could still impose requirements and restrictions regarding non-compete agreements, however, if they give greater protections than those provided by the proposed rule.

The proposed rule will be published in the Federal Register, after which the public will have 60 days to submit comments. The FTC may then make changes before deciding whether to submit a final rule. If a final rule is published in the Federal Register, it would take effect after 60 days. Legal challenges to the final rule would likely follow.

Importantly, employers and businesses would have to comply with the final rule within 180 days of its publication. For now, employers and businesses that utilize non-compete agreements should be mindful that significant alterations to your employment practices regarding such agreements may soon be needed. To better understand how this could impact your business, you should work closely with counsel to review and assess the need to update existing employment practices and agreements. If you have questions concerning this proposed rule, please feel free to contact one of our employment attorneys by calling (501) 371-9999.

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