Personal Finance

Proposed ban on noncompete clauses could affect 'every business in the country,' says attorney — what that means for you

Key Points
  • The Federal Trade Commission proposed a rule that would ban companies from requiring workers to sign noncompete clauses.
  • Approximately 30 million workers are bound by these agreements, which are meant to protect the investments companies have put into their businesses and employees.
  • Without them, wages could rise by nearly $300 billion a year.
FTC proposes new rule to ban non-compete clauses
FTC proposes new rule to ban non-compete clauses

Job hopping is widely considered the best way to improve your career prospects and pay.

Sometimes, noncompete clauses stand in the way. These contracts are meant to protect the investments companies have put into their businesses and employees. It's estimated that more than 30 million workers — or roughly 18% of the U.S. workforce — are required to sign one before accepting a job.

Recently, the U.S. Federal Trade Commission proposed a new rule banning the use of noncompete clauses in employee contracts, which suppresses wages, hampers innovation and prevents entrepreneurs from starting new businesses, the agency said.

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The proposed rule would also require companies with existing noncompete agreements to scrap them and to inform current and past employees that they have been canceled.

"That's part of what makes this so radical," said Michael Schmidt, a labor and employment attorney at Cozen O'Connor in New York. Not only is "the federal government taking this action broadly but with practically no exception."

As a result, the impact will be felt by companies with employees who are governed by noncompetes as well as companies looking to hire workers who are bound by noncompetes, said Benjamin Dryden, a partner at Foley & Lardner in Washington, D.C., who specializes in antitrust issues relating to labor and employment.

"This regulation will affect, more or less, every business in the country," he said.

Noncompetes are increasingly used across industries

South_agency | E+ | Getty Images

"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," FTC Chair Lina Khan said in a statement. 

In many cases, noncompetes affect white-collar workers in fields such as finance and technology but they are increasingly used across a wide range of industries, the FTC said, "from hairstylists and warehouse workers to doctors and business executives."

One report from the White House and U.S. Department of the Treasury found that 15% of workers without a college degree are subject to noncompete agreements, as are 14% of workers earning less than $40,000

A ban could boost wages by nearly $300 billion a year and narrow the pay gaps between white workers and minorities, as well as between men and women.

If passed, this regulation "will open up more competition between companies for workers," said Najah Farley, senior staff attorney at the National Employment Law Project.

Noncompetes degrade wages and working conditions by eliminating one of the most effective means workers have to improve their job quality — advocating for or moving to a better job.
Najah Farley
senior staff attorney at the National Employment Law Project

"Employers have taken advantage of the lack of laws and regulations in this area to push these agreements onto unsuspecting workers across all income levels and job titles," Farley said.

"Noncompetes degrade wages and working conditions by eliminating one of the most effective means workers have to improve their job quality — advocating for or moving to a better job," she said.

"When appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition," Sean Heather, the U.S. Chamber of Commerce's senior vice president for international regulatory affairs and antitrust, said in a statement. 

An outright ban is "blatantly unlawful," Heather said. "Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule." 

There are still several steps before the proposed regulation will go into effect, including the "inevitable litigation" challenging the FTC's authority, cautioned labor and employment attorney Schmidt.

This rulemaking process could take up to a year or even longer if it gets tied up in the court system, Schmidt said.

What employees should do now

Thomas Barwick | Getty Images

Workers who have been impacted by noncompetes should submit comments to the FTC on the proposed rule, Farley advised.

The comment period is open through March 10 and the FTC will review each submission and make changes based on that feedback.

"The more people who submit comments, the better," she said.

What employers should do now

Companies should also take advantage of the FTC's 60-day comment period and "let their voices be heard," Schmidt advised.  

This is meant to be a "constructive process," Dryden said. "If you think this will do harm to your legitimate business, submit comments to the FTC explaining your thoughts."

"I wouldn't be surprised if the FTC ends up scaling back this regulation," he added.

Still, "there was clearly momentum building toward this," Dryden said. In fact, many states already have limitations on noncompete agreements and it's not surprising the federal government is testing a blanket ban under Section 5 of the FTC Act, which prohibits unfair methods of competition, he said. 

"It's too early for businesses to take any drastic action, but companies should be mindful that's a real risk," Dryden said.

For now, "use this as a reason to look, as an organization, at how you are protecting your business," Schmidt advised. There may be other contracts, such as non-disclosure or non-solicit agreements, that can accomplish the same goal.

"Even if this FTC rule doesn't ultimately survive, state and local governments are becoming more active," he said. "We are going to continue to see this trend of limitations and restrictions whether it's by state legislatures or state attorney generals."

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