FTC Proposes Rule to Ban Noncompete Contracts

By Trent Cotney.

Learn about the new rule on noncompete clauses proposed by the FTC and what kind of implications this has for companies in the United States.

On Thursday, January 5, the Federal Trade Commission (FTC) proposed a rule that would prohibit employers from requiring noncompete clauses from their workers. Such a rule would have huge implications for how companies operate.  

How noncompete contracts work 

Traditionally, noncompete contracts have prevented employees from leaving a company and getting new jobs with a competitor, often for a fixed period of time. For some time, many economists have argued that this practice is harmful. They claim it can keep workers’ pay lower, discourage new businesses from being created, and ultimately cause consumer prices to rise. 

Noncompete agreements have been in use for hundreds of years. They were initially created to protect a company’s trade secrets, but over the years, they have become more common, applying to executives as well as lower-wage workers.  

If this ban is finalized, companies will no longer be allowed to enter noncompete agreements with their workers. They would also have to cancel any such agreements that currently exist. The rule will apply not only to full-time employees but to all workers, including interns, volunteers, independent contractors, and apprentices. Many industries — including IT, construction, health, and retail — could feel the impact. 

The effect of noncompete agreements 

According to the FTC, ending noncompete contracts would increase wages by as much as $300 million yearly. It would also provide some 30 million Americans with opportunities to find new jobs.  

Across the country, an estimated 20 percent of workers have signed noncompete agreements. Such agreements protect their employers by preventing them from jumping to a competitor and taking their company knowledge and talents elsewhere. Many business owners assert that without noncompete agreements, they are vulnerable to their trade secrets and strategies walking out the door. 

However, workers argue that such contracts can lock them out of their preferred industries and force them into lower-paying jobs in other fields.  

Some states, including California, North Dakota and Oklahoma, already prohibit noncompete contracts. And other states allow them only for workers with a specific income.  

How the proposed rule came about 

The proposed rule is part of a 2021 executive order from the Biden White House that promotes competition in the American economy. With it, the FTC wants to empower U.S. workers by testing and stretching antitrust enforcement parameters.  

According to FTC Chair Lina Khan, noncompete agreements hinder workers and make it difficult for them to secure the best jobs for themselves. With the rule, she says that companies will have to compete for the best workers, which could lead to higher salaries and better working conditions.  

Opposition to the proposed rule 

Companies across the nation are concerned about the impact of this new rule. In 2021, the U.S. Chamber of Commerce asserted that the FTC does not have the legal authority to impose such a rule, and it would ultimately hurt consumers and prevent innovation. 

Since the beginning of the COVID-19 pandemic, many companies have struggled to keep employees. And their challenges have been compounded by supply chain issues. Many fear that without noncompete agreements, even more employees will resign and look for work elsewhere. 

What to expect in the months ahead 

The FTC presently has a Democratic majority and voted 3-1 to proceed with the notice. It will be available for public comment for 60 days after being published in the Federal Register. 

It is important to note that his proposed rule does not impact nondisclosure agreements and other employment stipulations. However, the FTC could address such provisions if they restrict workers’ freedom in finding new jobs.  

If you are a business owner and believe that this proposed rule would harm your ability to hire and retain workers, be sure to review the rule and offer your comments. (Note: the notice has not been published yet. This links only to the main Federal Register site.)

About Trent Cotney

Trent Cotney is a partner and Construction Practice Group Leader at the law firm of Adams and Reese LLP and NRCA General Counsel. For more information, reach out to Trent at trent.cotney@arlaw.com.

The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.