On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that would prevent employers from imposing noncompete clauses on their workers, prohibiting them from joining a competitor. The move follows an executive order President Biden signed in 2021 targeting anticompetitive practices by big businesses.
“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,” FTC Chair Lina M. Khan said in a statement.
The Backdrop to the FTC’s Proposed Rule on Noncompete Agreements
A non-compete clause or agreement prevents employees from working for a competing employer or starting a competing business within a particular geographic area and timeframe after the employment relationship ends. While executive employment contracts usually include noncompete provisions, their use has become widespread, impacting employees at all levels, including low-wage workers.
According to the FTC, one in 5 workers (approximately 30 million people) is under a non competes, effectively preventing them from pursuing better employment opportunities. The proposed rule is based on a preliminary finding that such clauses stifle competition in violation of Section 5 of the Federal Trade Commission Act.
“By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition,” said Kahn.
Highlights of the Proposed Rule
The FTC’s proposed rule would ban noncompete clauses by making it illegal for employers to:
- Enter or attempt to enter a noncompete with an employee
- Maintain a noncompete with a worker
- Represent to a worker that they are subject to a noncompete agreement
The new rule would also require employers to rescind existing noncompetes and inform employers that the agreement is no longer in effect. Also, the proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid.
The proposed rule would not apply to employment restrictions like non-disclosure agreements. However, certain restrictive covenants may constitute what the FTC labels defacto noncompete provisions, such as:
- A broadly written non-disclosure agreement that effectively prevents an employee from working in the same field when the employment relationship ends
- A contractual provision requiring a worker to pay the employer for training costs if the employment terminates within a specified period, where the payment is not reasonably related to the cost incurred by the employer for training the worker
The FTC estimates that the proposed rule banning noncompetes would boost wages by nearly $300 billion annually and expand career opportunities for about 30 million workers. The agency is seeking public comment on the proposed rule; comments are due 60 days after the Federal Register publishes it.
Currently, noncompetes are enforceable in New York. However, courts are reluctant to enforce overly broad noncompetes. Whether the rule is adopted in its present form or modified to reflect public comments remains to be seen. In the meantime, talk to an experienced employment lawyer if you are involved in a dispute over a noncompete agreement.