Understanding the FTC Proposed Rule to Ban Non-Compete Clauses
The Federal Trade Commission (FTC) started 2023 with its own sort of fireworks by proposing a rule that would effectively ban non-compete agreements. The rule also would apply to non-competes currently in effect.
The Non-Compete Clause Rule defines a non-compete 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.” The definition goes beyond non-compete agreements to include any provision that has the same effect as a non-compete according to the FTC’s “functional test.” The rule would also cover agreements with all workers, not just employees.
The Notice of Proposed Rulemaking (NPRM) includes a fact sheet outlining the FTC’s arguments in favor of the proposed rule:
Non-compete clauses significantly reduce workers’ wages. The agreements give employers the power to suppress wages by restricting workers who leave the company to start or join a competing business. FTC estimates that the proposed rule would increase employees’ earnings across job levels and industries by $250 billion to $296 billion per year.
Non-compete clauses stifle new businesses and ideas. Evidence shows that non-compete clauses hinder innovation by preventing entrepreneurs from forming new businesses and inhibiting workers from bringing innovative ideas to new companies. In some markets, restricting employee movement can raise prices for consumers.
Non-compete clauses can exploit workers and hinder economic liberty. Most non-compete clauses are take-it-or- leave-it contracts that give employees less bargaining power than their employers. Workers are forced to stay in jobs they want to leave, threatening their ability to practice their trade
Employers have other ways to protect trade secrets and other valuable investments that are significantly less harmful to workers and consumers. Employers argue that non-compete agreements with their employees protect confidential information. But in California, North Dakota, and Oklahoma—the states that do not allow employers to enforce non-compete clauses—industries that rely on trade secrets have still flourished. Employers can protect their investments without non-compete clauses.
The proposed ban stems from President Biden’s Executive Order on Promoting Competition in the American Economy, which included directing the FTC to curtail the unfair use of non-compete clauses that could unfairly limit worker mobility. Democratic Commissioners issued statements in support of the proposed rule, while Republican Commissioner Christine Wilson issued a dissenting opinion, saying that the rule is a departure from hundreds of years of legal precedent, proposing “a rule that prohibits conduct that 47 state legislators have chosen to allow” and “bans conduct that courts have found to be legal.”
For now, employers that require non-compete agreements must be mindful of possible changes. Carefully review existing non-compete clauses and other agreements with similar requirements. Consult an employment attorney who understands the proposed rule and its possible impact on your business. In the meantime, submit comments on the proposed rule by March 10, 2023. We are happy to help, as we continue to monitor the proposed rule and FTC actions.