FTC Proposes Ban on Employment-Related Non-Compete Clauses

On January 5, 2023, the Federal Trade Commission (“FTC”) unveiled a Notice of Proposed Rulemaking (“NPRM”) that would ban virtually all employment-related non-compete agreements (“NCAs”) on the ground that such agreements are an “unfair method of competition,” thereby violating Section 5 of the FTC Act.

Non-compete agreements are clauses in employment contracts that prohibit employees from working for competing companies for a defined period following the employee’s departure from the contracting employer. According to FTC Chair Lina M. Khan, these agreements “block workers from freely switching jobs,” not only “depriving them of higher wages and better working conditions,” but also “depriving businesses of a talent pool that they need to build and expand.” Khan believes that banning NCAs will “promote greater dynamism, innovation and healthy competition” within the labor market.

Research indicates that NCAs significantly restrict worker mobility and suppress wages.  As Khan emphasizes, “the freedom to change jobs is core to economic liberty and to a competitive, thriving economy.”  In fact, the FTC estimates that eliminating the practice could result in annual wage increases of almost $300 billion, since approximately one in five workers—ranging from hairstylists to business executives—are constrained by such clauses in their employment contracts. Furthermore, researchers predict that a ban on NCAs may close racial and gender wage gaps by 3.6 to 9.1%.

If successful, the new rule would extend to anyone who works for an employer, including independent contractors. It would also require employers to rescind any existing NCAs and actively inform employees that the provisions are no longer in effect. Additionally, the NPRM aims to outlaw employment contract language that amounts to “de facto” non-compete clauses, including nondisclosure agreements “written so broadly that it effectively precludes the worker from working in the same field.”

However, the NPRM does not come without opposition.  The FTC’s sole Republican member, Christine Wilson, and the Chamber of Commerce voiced their dissent, claiming that the FTC does not have authority to promulgate rules regarding unfair methods of competition. Wilson further argued that studies on the harmful effects of NCAs are “scant” and that a ban would bring about “negative unintended consequences” such as “higher fees and broker misconduct.”

The proposed rule—the FTC’s first exercise of its regulatory authority to combat unfair competition in decades—aligns with the agency’s recent efforts to enforce Section 5 of the FTC Act and contributes to its overall mission of promoting fair competition across the labor market. The public can submit comments on the NPRM through March 20, 2023.

The legal team at Miller Shah LLP has extensive experience representing antitrust, competition, and trade regulation matters. If you have any questions regarding this subject or this post, please contact Chiharu Sekino (cgsekino@millershah.com) or Anika Keuning (askeuning@millershah.com). The Firm can also be reached toll-free at (866) 540-5505.