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Thursday, January 5, 2023

FTC Proposes Rule to Ban Noncompete Clauses

The Federal Trade Commission proposed a new rule that would ban employers from imposing noncompetes on their workers, a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. By stopping this practice, the agency estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.

The FTC is seeking public comment on the proposed rule based on a preliminary finding that noncompetes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said Chair Lina M. Khan. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

A noncompete agreement, also known as a covenant not to compete or a restrictive covenant, is a contract between an employee and an employer in which the employee agrees not to work for a competing company or to start their own competing business for a certain period of time after leaving their current job. These agreements are often used to protect an employer's legitimate business interests, such as trade secrets, customer relationships, and confidential information.

However, noncompete agreements can also be controversial, as they can limit an individual's ability to find employment in their field of expertise and potentially stifle competition in a given industry. As a result, the enforceability of noncompete agreements varies from state to state and is often subject to legal challenges.

In general, courts will enforce a noncompete agreement if it is reasonable in scope and duration, and if it is necessary to protect the legitimate business interests of the employer. Factors that a court may consider when determining the reasonableness of a noncompete agreement include the specific industry in which the employee works, the employee's level of seniority and access to sensitive information, and the geographical area covered by the agreement.

While noncompete agreements can be valuable tools for protecting an employer's interests, it is important for both parties to carefully consider the terms of the agreement and to ensure that it is reasonable and fair. Employers should avoid overreaching in their restrictions, as overly broad noncompete agreements may not be enforceable in court. Employees, on the other hand, should be aware of the potential limitations that a noncompete agreement may impose on their future employment opportunities and carefully evaluate whether the benefits of accepting the agreement outweigh the potential drawbacks.

Noncompete agreements are a common tool used by employers to protect their legitimate business interests, but they can also be controversial and are subject to legal challenges. It is important for both parties to carefully consider the terms of the agreement and to ensure that it is reasonable and fair in order to avoid disputes and legal challenges.

Companies use non-competes for workers across industries and job levels, from hairstylists and warehouse workers to doctors and business executives. Employers often use their outsized bargaining power to coerce workers into signing these contracts. Noncompetes harm competition in U.S. labor markets by blocking workers from pursuing better opportunities and by preventing employers from hiring the best available talent.

“Research shows that employers’ use of noncompetes to restrict workers’ mobility significantly suppresses workers’ wages—even for those not subject to noncompetes, or subject to noncompetes that are unenforceable under state law," said Elizabeth Wilkins, Director of the Office of Policy Planning. “The proposed rule would ensure employers can’t exploit their outsized bargaining power to limit workers’ opportunities and stifle competition.”

The evidence shows that noncompete clauses also hinder innovation and business dynamism in multiple ways—from preventing would-be entrepreneurs from forming competing businesses to inhibiting workers from bringing innovative ideas to new companies. This ultimately harms consumers; in markets with fewer new entrants and greater concentration, consumers can face higher prices—as seen in the healthcare sector.

To address these problems, the FTC’s proposed rule would generally prohibit employers from using noncompete clauses. Specifically, the FTC’s new rule would make it illegal for an employer to:
  • enter into or attempt to enter into a non-compete with a worker;
  • maintain a noncompete with a worker; or 
  • represent to a worker, under certain circumstances, that the worker is subject to a non-compete.

The proposed 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 noncompetes and actively inform workers that they are no longer in effect.

The proposed rule does not apply to other types of employment restrictions, like non-disclosure agreements. However, other types of employment restrictions could be subject to the rule if they are so broad in scope that they function as non-competes.

This NPRM aligns with the FTC’s recent statement to reinvigorate Section 5 of the FTC Act, which bans unfair methods of competition. The FTC recently used its Section 5 authority to ban companies from imposing onerous noncompetes on their workers. In one complaint, the FTC took action against a Michigan-based security guard company and its key executives for using coercive noncompetes on low-wage employees. The Commission also ordered two of the largest U.S. glass container manufacturers to stop imposing noncompetes on their workers because they obstruct competition and impede new companies from hiring the talent needed to enter the market. This NPRM and recent enforcement actions make progress on the agency’s broader initiative to use all of its tools and authorities to promote fair competition in labor markets.

The Commission voted 3-1 to publish the Notice of Proposed Rulemaking, which is the first step in the FTC’s rulemaking process. Chair Khan, Commissioner Rebecca Kelly Slaughter, and Commissioner Alvaro Bedoya issued a statement. Commissioner Slaughter, joined by Commissioner Bedoya, issued an additional statement. Commissioner Christine S. Wilson voted no and also issued a statement

The NPRM invites the public to submit comments on the proposed rule. The FTC will review the comments and may make changes in a final rule based on the comments and on the FTC’s further analysis of this issue. Comments will be due 60 days after the Federal Register publishes the proposed rule.

 Jon L. Gelman of Wayne, NJ, is the author of NJ Workers’ Compensation Law (West-Thomson-Reuters) and co-author of the national treatise Modern Workers’ Compensation Law (West-Thomson-Reuters). For over five decades, the Law Offices of Jon L Gelman  1.973.696.7900  has been representing injured workers and their families who have suffered occupational accidents and illnesses.

Jon L. Gelman  |  Attorney at Law 

Wayne NJ 07470-2805 |

(973) 696-7900

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Author: "Workers' Compensation Law" West-Thomson-Reuters