FTC Proposes New Rule Banning Noncompete Agreements
Earlier this month, the FTC proposed a rule to ban noncompete agreements, saying they hurt workers and hinder innovation. However, the proposed rule is already encountering opposition from business groups and appears likely to face legal challenges.
The Federal Trade Commission (FTC) recently proposed a new rule that would ban employers from imposing noncompete agreements on their workers.
Approximately one-in-five American workers—roughly 30 million people—are bound by a noncompete clause that prevents the employee from working for a competing employer or starting a competing business, typically within a certain geographic area and period of time after the employee’s employment ends.
The FTC is seeking public comment on the proposed rule, which is based on an agency determination that noncompete agreements constitute an unfair method of competition that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. The Commission estimates that the proposed rule would increase American workers’ earnings between $250 billion and $296 billion per year.
“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC Chair Lina Khan. “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 FTC’s proposed rule would apply to anyone who works for an employer, whether paid or unpaid, as well as independent contractors. It would also require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect.
The proposed rule is already encountering opposition from business groups and appears likely to face legal challenges. The U.S. Chamber of Commerce has called the proposed rule “blatantly unlawful” and beyond the authority of the FTC.
“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,” said Sean Heather, U.S. Chamber senior vice president for international regulatory affairs and antitrust, in a statement.