On January 5, 2023, the Federal Trade Commission (“FTC”) issued a proposed rule that would ban the use of non-competition agreements by US employers. Following an Executive Order issued by President Biden in July 2021, the FTC has moved to prohibit employers from imposing non-competition agreements on their workers.
In a press release the FTC announced the proposed rule:
FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition
According to the FTC, “the new rule that would ban employers from imposing noncompetes on their workers, a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. By stopping this practice, the agency estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.”
Why Has the FTC Proposed a Ban on Noncompetes?
“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC Chair Lina M. Khan. “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 need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
As we have noted in prior blog posts in August and October of last year, [See posts from Oct. 11, 2022 Too Much Is Usually Never a Good Thing. How the Overuse of Non-Competes and Other Restrictive Contracts Is Hurting Both Workers and Businesses and Prompting Nationwide Calls for Reform and August 2, 2022 Non-Competes - What To Know Before You Sign ], the use of noncompete agreements which used to be reserved for highly paid executives or sales employees with access to confidential, sensitive company information has risen dramatically to include many lower wage workers in industries from fast food restaurants to retail to hair salons. In many cases, employers use their outsized bargaining power to coerce workers into signing these contracts. Today, workforce studies estimate that over 30 million American workers are asked to sign non-competes as a condition to accepting a job offer.
While the stated intent of noncompetes may be to protect a company’s trade secrets or investments in specialized training for its employees, the practical effect of noncompetes is to unfairly block workers from changing jobs. Without the ability to change jobs, may workers, especially those in lower wage positions, lose the ability to improve or advance by moving to another job with higher wages or better working conditions, limiting their economic opportunities and suppressing their income.
What Would the New Rule Do Once It Gets Finalized?
The FTC’s proposed rule would generally prohibit employers from using noncompete clauses. Specifically, the FTC’s new rule would make it 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 proposed rule would apply to anyone who works for an employer, whether paid or unpaid, including an employee, an individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.
It would also require employers to withdraw existing noncompetes and actively inform workers that they are no longer in effect.
The proposed rule would generally not apply to other types of employment restrictions, like non-disclosure agreements. However, other types of employment restrictions could be subject to the rule if they are so broad in scope that they function as noncompetes regardless of what they are called.
What Happens Next?
The FTC’s Proposed Rule will not go into effect right away. If you have already signed or been asked to sign a noncompete, this proposed rule does not change anything yet. The FTC’s first step is to issue a Notice of Proposed Rulemaking (“NPRM”). This Notice calls for a public comment period during which workers, employers, and anyone else potentially impacted or interested in the proposed rule can share their views on the proposal. The FTC will review the comments and may make changes, in a final rule, based on the comments and on the FTC’s further review of this issue. Comments will be due 60 days after the Federal Register publishes the proposed rule.
Once a final rule is issued, there is another 180 days before it would go into effect. But experts expect there to be pushback to the proposed rule from many businesses and efforts to try and block it from going into effect. Only time will tell if the FTC’s proposed ban will eventually happen.
How Can I Submit Comments on the Proposed Rule?
Interested parties may file a comment online or on paper. For on-line comments, write “Noncompete Clause Rulemaking, Matter No. P201200” on your comment, and file your comment online at https://www.regulations.gov, by following the instructions on the web-based form.
If you prefer to file your comment on paper, mail your comment to the following address:
Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue, NW, Suite CC-5610 (Annex C), Washington, DC 20580;
Or deliver your comment to the following address:
Federal Trade Commission, Office of the Secretary, Constitution Center, 400 7th Street SW, 5th Floor, Suite 5610, Washington, DC 20024
For more information on the Proposed Rule and how to submit comments see:
FEDERAL TRADE COMMISSION: Non-Compete Clause Rule
FACT SHEET: FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt