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The Federal Trade Commission released a proposed rule that would prevent employers from entering into non-compete clauses with workers and require employers to rescind existing non-compete clauses. The rule includes “independent contractors” in its definition of “worker” and would supersede any conflicting state laws or regulations that provide less protections to workers.
A non-compete clause is a contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends.The definition of non-compete clause would generally not include other types of restrictive employment covenants—such as non-disclosure agreements (“NDAs”) and client or customer non-solicitation agreements —since these generally do not prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment, unless they are unusually broad in scope that they function as such a restrictive agreement.
The rule would ban employers from entering noncompete clauses with their workers, including independent contractors, which is not defined through reference to any other existing statute, such as in the Internal Revenue Code or the Fair Labor Standards Act. The FTC stated this was to avoid having employers misclassify employees as independent contractors to evade the rule’s requirements. Gig economy workers were specifically mentioned as an example of independent contractors. The Commission specifically invites comments on whether the rule should apply uniformly to all workers or differentiate between categories of workers based on a worker’s job function, occupation, earnings, another factor, or some combination of factors.
The FTC cites their rulemaking authority under Section 5 of the Federal Trade Commission Act declaring “unfair methods of competition” to be unlawful. Recently, the FTC exercised its enforcement authority on this issue with actions against three companies that resulted in settlements where the companies agreed to stop enforcing their non-compete agreements. Check out the FTC press release for more details. Legal challenges to the rule are anticipated.
Comments on the rule are due 60 days post publication in the Federal Register. See the Fact Sheet and stay tuned to the Independent Contractor Status page for more information.