A proposed rule issued Thursday by the Federal Trade Commission would ban noncompete clauses’ use in employment contracts in all businesses nationwide.
If finalized as proposed, businesses would have six months to rescind existing noncompete clauses with workers and actively inform employees the contracts are no longer in effect.
“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” FTC Chair Lina M. Khan said. “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.”
The agency estimated noncompete clauses affect more than 30 million working Americans. The FTC estimated the proposed rule could increase worker wages nationwide by nearly $300 billion annually.
The proposal stems from the FTC’s preliminary finding that noncompetes constitute an unfair method of competition, and therefore violate Section 5 of the Federal Trade Commission Act.
The decision is expected to be challenged, both in comments submitted during the 60-day comment period and if the proposal is finalized. The U.S. Chamber of Commerce quickly came out against the proposal, saying the FTC lacked the regulatory authority to ban the practice.
“Today’s actions by the Federal Trade Commission to outright ban noncompete clauses in all employer contracts is blatantly unlawful,” said Sean Heather, U.S. Chamber senior vice president for International Regulatory Affairs and Antitrust. “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. The Chamber is confident that this unlawful action will not stand. Attempting to ban noncompete clauses in all employment circumstances overturns well-established state laws which have long governed their use and ignores the fact that, when appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition.”
The FTC said companies use noncompetes for workers across industries and job levels, from hairstylists and warehouse workers to doctors and business executives. The agency said 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, FTC director of the Office of Policy Planning. “The proposed rule would ensure that employers can’t exploit their outsized bargaining power to limit workers’ opportunities and stifle competition.”
The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid.
The FTC said the proposed rule would generally not apply to other types of employment restrictions, such as 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 noncompetes.
The FTC voted 3-1 to publish the proposal. Khan, Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro Bedoya voted to publish the proposal while Commissioner Christine S. Wilson voted against.
Wilson said the FTC’s proposal is a “radical departure” from legal precedent with what appears to be a lack of clear evidence to support the proposal.
“What little enforcement experience the agency has with employee non-compete provisions is very recent (within the last week) and fails to demonstrate harm to consumers and competition,” Wilson said. “Lacking enforcement experience, the commission turns to academic literature – but the current record shows that studies in this area are scant, contain mixed results, and provide insufficient support for the scope of the proposed rule. … The suspension of non-competes across all industry sectors in the U.S. undoubtedly will impose a much larger raft of unintended consequences.”
