Non-Compete Agreements May be Banned by the FTC

On January 5, 2023, the The Federal Trade Commission (FTC) announced a proposed  new rule that would ban employers from imposing   non-compete agreements or clauses  on their workers (also termed as “noncompete”). These have become increasingly common in the U.S. labor market.  The FTC considers that they limit the mobility of workers and their ability to pursue better opportunities. If approved, the Rule will  radically change important provisions typically included in employment contracts given to key employees.

In non-compete agreements or clauses  the employee agrees not to enter into competition with its employer after the employment period is over. The agreements are often  attached to non-solicitation of other employees, clients and non-disclosure of information acquired while employed.

The legal argument for FTC  involvement is that  they constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.  The Commission voted 3-1 in favor to publish the Notice of the proposed rule. It is the first step in the FTC’s rulemaking process.  As expected the three that voted in favor Lina Khan, Rebecca Kelly and Alvaro Bedoya were democrat appointed members. Christine S. Wilson voted no.  Curiously, the commissioners do not have any business background, they have mostly worked as employees for government and non profit institutions.

The proposed rule would have far-reaching benefits for American workers, especially those in industries and job levels that are disproportionately affected by non-compete clauses. The FTC estimates that 18% of the workforce is subject to a non-compete. It argues that the proposed rule not only would wages increase, but workers would be able to seek new opportunities and pursue better career paths more easily. Moreover, it would provide a more level playing field for businesses starting up and competing against larger companies. It is expected that the proposed rule would reduce the prevalence of non-compete significantly, and thus benefit employees who are limited by them.

The proposed rule would generally prohibit employers from using non-compete clauses and make it illegal for an employer to: enter into or attempt to enter into a non-compete with a worker; maintain a non-compete with a worker; or represent to a worker, under certain circumstances, that the worker is subject to a non-compete clause.

The FTC proposes to categorize non-compete as an unfair method of competition by adding  text to Title 16, Chapter 1 of the Code of Federal Regulations. Section 910.2(a) to state as follows:

(a) Unfair methods of competition. It is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.

The proposed non-compete rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also require employers to rescind existing noncompete clauses and or agreements. It would not apply to other types of employment restrictions, like nondisclosure agreements.

As to the rescission provision, the Proposed Rules states that:

(1) Rescission requirement. To comply with paragraph (a) of this section, which states that it is an unfair method of competition for an employer to maintain with a worker a non-compete clause, an employer that entered into a non-compete clause with a worker prior to the compliance date must rescind the non-compete clause no later than the compliance date.

To enforce this provision the

employer that rescinds a non-compete clause pursuant to paragraph (b)(1) of this section must provide notice to the worker that the worker’s non-compete clause is no longer in effect and may not be enforced against the worker.

The FTC provides a model language of the notice to the worker that the non-compete clause is no longer in effect and may not be enforced against the worker.

The FTC will review the comments, may make changes, to the  final rule. The comment period is open through Mar 10, 2023.

Here is a link to the proposed rule.

The FTC has previously taken action acting against companies that it considers are requiring employees to unnecessarily  sign no-compete restrictions.   These restrictions ranged from low-wage security guards to  to engineers.  One of the employers targeted by the FTC prohibited their security guards after terminating their job, from working for a competing business within a 100-mile radius of their job site.  More information can be found in the FTC website here.