FTC proposes full-scale ban on noncompete clauses

Noncompete clauses are legal promises employers, ranging from hair salons to medical practices to technology, require new workers to sign, stating they will not work at a similar company for a certain period after their employment ends. The clauses stifle healthy competition, dampen wages, and raise the price of goods, the FTC stated in a press release.

The clauses are an unfair method of competition and violate Section 5 of the Federal Trade Commission Act, according to the agency.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC Chair Lina Khan.

The FTC’s proposed rule, subject to a 60-day comment period, would make it illegal for employers to enter into noncompete contracts with employees or to lead an employee to believe they are subject to a noncompete clause. Any existing noncompete clauses would become invalid, and employers would have to inform their employees the requirements were rescinded.

The rule would also apply to independent contractors and unpaid workers. Nondisclosure agreements and other types of employment restrictions would not fall under the rule’s scope, the FTC said.

The agency’s commissioners voted 3-1 to issue the proposal. Commissioner Christine Wilson, in her dissenting statement, said the rule represented “a radical departure from hundreds of years of legal precedent.”

“The suspension of noncompetes across all industry sectors in the U.S. undoubtedly will impose a much larger raft of unintended consequences,” she wrote.

The proposed rule comes a day after the FTC announced its first ever lawsuits against three companies and two individuals regarding unlawful noncompete restrictions.

“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,” Khan said.

Ending noncompete clauses would expand career opportunities for 30 million U.S. workers and boost the economy by $300 billion, the FTC estimated.

“By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition,” said Khan.

Khan has indicated since taking office in June 2021 that ending noncompete clauses would be a priority. Under her leadership, the FTC swiftly rescinded a 2015 policy statement stating it would interpret Section 5 “under a framework similar to the rule of reason,” which she claimed undermined the agency’s legitimacy.

In November, Khan and her fellow Democratic commissioners issued a new policy statement “[r]eactivating Section 5 in a way that is fully faithful to the authority that Congress gave us.”

The U.S. Chamber of Commerce criticized Thursday’s rule proposal as “blatantly unlawful.” The FTC does not have the authority to promulgate the rule, the chamber said in a statement, adding it is “confident that this unlawful action will not stand.”

Nonprofits and consumer advocacy groups, meanwhile, have been urging the FTC to ban noncompete clauses, citing a July 2021 executive order issued by President Joe Biden directing the agency to consider such action.

“Employers’ use of noncompete clauses inflict real and substantial harms on the American worker and the overall U.S. economy without any legitimate justification,” a coalition of 25 groups said in a Dec. 14 letter to the agency.