Regulators propose rule that would ban noncompete clauses

The Federal Trade Commission is proposing a new rule that would prevent employers from imposing noncompete clauses for workers that prohibit them from joining a competitor, typically for a period of time, after they leave the company.

The proposed rule released Thursday follows an executive order signed by President Joe Biden in 2021 targeting what he labeled as anticompetitive practices in technology, health care and other parts of the economy. The order included a call for banning or limiting noncompete agreements to help boost wages.

Noncompete agreements have become increasingly common in the workplace, with one estimate finding that nearly a third of companies require all their workers to sign noncompetes. States that have banned these types of agreements, such as Hawaii and Oregon, have seen workers’ wages rise afterwards.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” Chari Lina Khan said in a prepared statement. “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.”

The FTC proposal is based on a preliminary finding that noncompete clauses quash competition in violation of Section 5 of the Federal Trade Commission Act. Section 5 bans unfair methods of competition.

The proposed rule comes a day after the FTC settled with three companies that required their workers to sign noncompetes, including a security company based in Michigan that threatened minimum-wage guards with a $100,000 penalty if they took a job with a competitor. 

The new rule would make it illegal for an employer to enter into or attempt to enter into a noncompete with a worker; maintain a noncompete with a worker; or represent to a worker, under certain circumstances, that the worker is subject to a noncompete.

It would apply to independent contractors and anyone who works for any company, whether paid or unpaid. It would also require employers to rescind existing noncompete clauses and actively inform workers that they are no longer in effect.

The proposed rule would generally not apply to other types of employment restrictions, like nondisclosure agreements, but other types of employment restrictions could be subject to the rule if they are so broad that they function as noncompete clauses. It would also not apply to agreements between companies and their franchisees.

The agency estimates that the new proposed rule could boost wages by nearly $300 billion a year and expand career opportunities for about 30 million Americans.