Federal Trade Commission Proposes Ban on Non-Compete Agreements- Netchex

The New Year is a time for change—both personally and professionally. The Federal Trade Commission kicked off the new year with a historical proposal—one they hope will last, unlike so many unfulfilled New Year’s resolutions. 

The Federal Trade Commission proposed a rule that would prohibit employers and employees from entering non-compete agreements. Employers could not ask paid or unpaid employees, independent contractors, interns, volunteers, or apprentices to sign a non-compete agreement. The FTC claims these agreements raise a number of concerns for all workers, even for those not bound by a non-compete agreement:

  • Harm competition
  • Suppress labor mobility
  • Reduce wages

In a fact sheet accompanying the announcement, the FTC estimated that eliminating non-competes could increase employee earnings in the range of $250 billion to $296 billion per year. It also said the rule could address the agreements’ other impacts on innovation and worker mobility.

Non-Compete Ban Proposal Details

The proposed rule would apply retroactively. Employers would be required to rescind existing non-compete clauses and provide proper notice to workers that such clauses are no longer in effect within 45 days. It would also include a “limited exception” for non-compete clauses between the seller and buyer of a business.

The FTC elaborated that other forms of restrictive covenants (such as non-disclosure agreements and client/customer non-solicitation agreements) would not be included in the proposed law’s definition of a non-compete agreement. The language of the proposal is unclear, which would likely prompt employers to consider non-solicitation agreements and NDAs as alternatives to non-competes. Either way, if the final rule passes, another battle in the courts is expected. 

LEARN: What’s the Difference Between NDAs, Confidentiality Agreements, and Non-Compete Clauses

Stakeholders will be permitted to make public comments on the proposal for a period ending 60 days after it is published on the Federal Register. A compliance date would likely be set 180 days after the publication of a final rule.

As with anytime there are new compliance rules, employers will need to review certain clauses in their employment agreements and determine whether or not they function as non-compete clauses in practice. 

READ: Updating Employee Handbooks: Why, When, and How

More Information About the Fight Over Non-Compete Agreements

The commission’s announcement should not come as a total surprise. More than a year ago, President Biden issued an executive order encouraging the FTC to ban or limit the use of non-compete agreements. At the time, the White House said actions on non-competes would make it easier for workers to change jobs while raising wages.

Although non-compete agreements are typically associated with higher-ranking employees, a recent trend has shown more being created and enforced for everyday employees. A survey conducted by the Economic Policy Institute found that:

  • Almost half of organizations require at least some of their employees to sign non-compete agreements
  • Nearly a third of respondents in the survey said all employees at their establishments were required to enter into one of these agreements

A federal mandate like this would supersede any existing legislation centered around non-competes. Most states permit some form of non-compete agreements, while others have already passed laws limiting their use with varying success, including:

  • California
  • North Dakota
  • Montana
  • Oklahoma
  • Colorado
  • Illinois
  • Maine
  • Maryland
  • New Hampshire
  • Oregon, Rhode Island
  • Virginia
  • Washington
  • Washington, D.C.

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