Starting 2023 off with a bang, the Federal Trade Commission (FTC) proposed a new rule that would ban employers from the use of noncompete agreements.
“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” FTC Chair Lina M. Khan said in a statement. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they would need to build and expand.”
Pursuant to the proposed rule—which the agency based on a preliminary finding that noncompetes constitute an unfair method of competition in violation of Section 5 of the FTC Act—it would be illegal for an employer to enter into or attempt to enter into a noncompete with a worker; maintain a noncompete with a worker; or represent to a worker, under certain circumstances, that the worker is subject to a noncompete.
The FTC defined the term “noncompete clause” as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”
Whether a contractual provision is a noncompete clause would depend on how the provision functions, the FTC said, not on what the provision is called.
The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid, and it would require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect.
While the proposed rule would generally not apply to other types of employment restrictions (like nondisclosure agreements), the FTC cautioned that other types of employment restrictions could be subject to the rule “if they are so broad in scope that they function as noncompetes.”
The agency estimates that approximately 18 percent of workers in the United States are covered by noncompetes and that the proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for roughly 30 million Americans.
Public comments on the proposed rule—which the FTC introduced by a vote of 3 to 1—will be accepted until March 20.
In addition to general comments on the proposal, the agency asked for input on whether franchisees should be covered by the rule, whether senior executives should be exempted from the rule or subject to a rebuttable presumption rather than a ban, and whether low- and high-wage workers should be treated differently under the rule.
To read the Non-Compete Clause Rule, click here.
How to Navigate the Regulatory Trend to Ban and Criminalize Noncompetes
- On the heels of the Federal Trade Commission’s (FTC) January 5, 2023 proposed rule banning noncompetes, Manatt’s antitrust and employment law attorneys provided a comprehensive overview of the stepped-up efforts to camp down the use of noncompetes and reviewed other restrictions that limit employee mobility.
Why it matters: The FTC’s proposed rule was not a surprise, with the agency having taken several recent actions against companies for allegedly coercive or onerous noncompetes. In addition, President Joseph Biden signaled his support for the move back in 2021 when he signed an executive order aimed at promoting competition in the U.S. economy, featuring a total of 72 initiatives by more than a dozen federal agencies, including one encouraging the FTC to ban or limit noncompete agreements, as well as federal legislation introduced last fall that would impose a national ban.