FTC Intends to Ban Noncompete Agreements
Author: Michael Cardman, XpertHR Senior Legal Editor
January 5, 2023
The Federal Trade Commission (FTC) plans to ban noncompete agreements.
The agency today unveiled a proposed rule that, if finalized, would make it illegal for an employer to:
- Enter into or attempt to enter into a noncompete agreement with a worker;
- Maintain a noncompete agreement with a worker; or
- Represent to a worker, under certain circumstances, that the worker is subject to a noncompete agreement.
The rule also would require employers to rescind existing noncompete agreements and actively notify workers that they are no longer in effect.
The FTC said its definition of noncompete agreements would generally not include other types of restrictive covenants such as nondisclosure agreements or nonsolicitation agreements because those generally do not prevent a worker from finding work elsewhere once they leave a job. However, nondisclosure agreements and nonsolicitation agreements could be prohibited if they are "so unusually broad in scope" that they effectively function as noncompete agreements.
To justify its proposal, the FTC cited research that it said shows noncompete agreements reduce competition in labor markets, resulting in reduced wages for all workers, including those not bound by noncompete agreements.
The agency estimated that banning noncompete agreements would increase workers' total earnings by $250 to $296 billion per year.
Calling them a "widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses," the FTC concluded that noncompete agreements constitute an "unfair method of competition" and therefore violate Section 5 of the Federal Trade Commission Act.
The FTC recently issued a policy statement asserting its authority to include "various types of unfair conduct that tend to negatively affect competitive conditions" under this umbrella.
However, business groups questioned the FTC's authority to prohibit noncompete agreements, calling its proposal "blatantly unlawful."
"Since the agency's creation over 100 years ago, Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule," said Sean Heather, a senior vice president for the US Chamber of Commerce. "The Chamber is confident that this unlawful action will not stand."
Heather noted that several states already restrict the use of noncompete agreements. Banning them in all cases would overturn these well-established laws, he argued.
After the FTC publishes a Notice of Proposed Rulemaking (NPRM) in the Federal Register, employers will have 60 days to comment. Comments may be submitted online under Regulatory Information Number (RIN) 3084-AB74 or by mailing written submissions to:
Federal Trade Commission, Office of the Secretary
600 Pennsylvania Avenue, NW, Suite CC-5610 (Annex C)
Washington, DC 20580
If mailing comments, write "Non-Compete Clause Rulemaking, Matter No. P201200" on the comment and on the envelope.
After the comment period ends, the FTC will respond to comments and possibly make revisions before publishing a final rule. This final rule will include a formal effective date.