Kristen Salas Mationg
Loyola University Chicago School of Law, JD 2024
On January 5, 2023, the Federal Trade Commission (FTC) released a proposal to ban employers from the use of non-compete agreements with their workers. The FTC’s motivation behind the proposed rule is the protection of American workers, with the regulatory agency stating that non-compete agreements restrict about one in five American workers – about 30 million people. Additionally, the agency estimated that the rule could increase wages by $250 to $296 billion a year across the economy. Since seeking public comment on the ban, the FTC’s broad non-compete proposal has been met with both support and criticism.
The proposal and potential required compliance
The FTC’s proposed rule defines non-compete clause as having “the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer”.
The FTC’s definition of non-compete clause is notably broad in two ways: 1) the proposal applies to not just employees, but independent contractors, externs, interns, volunteers and 2) while about half of the states today have significant constraints on the use of non-competes, the proposed rule essentially places a nationwide ban on these clauses and agreements. Therefore, not only does the rule apply to both paid and unpaid workers with the potential to also affect LLC and partnership agreements, it supersedes any state laws currently in place and would require employers to rescind all existing non-compete agreements. There is only one narrow exception for certain types of mergers and acquisitions.
While the proposed rule is currently facing challenges of regulatory overreach, if the rule is passed, employers may be penalized up to $50,000 for each violation of the relevant sections of the FTC Act.
The impact of the ban on the American workforce
The FTC cited to the negative effects of non-compete clauses, emphasizing that they contribute to racial and gender wage gaps, reduce workers’ wages, affect labor mobility, and stifle new business and new ideas.
Many in the public have praised the proposed rule, highlighting that it would apply to all workers on the income ladder and would specifically assist non-unionized workers in their ability to move to better jobs at will. This increased labor mobility could have a major impact in how employers may incentivize their employees to stay with the company. However, the U.S. Chamber of Commerce and other organizations oppose the rule and argue that the FTC does not have the ability to ban nationwide “anticompetitive” practices. Further, employers say non-compete clauses are needed in order to protect their trade secrets and other confidential information. Both sides have noted that non-compete clauses can affect a company’s innovation of new ideas.
Public comments on both the proposed ban and alternatives must be submitted by March 20, 2023. If the ban is adopted by the FTC, the rule goes into effect 180 days after the final version is published. Any ban on non-compete agreements or amendment to the same will be unlikely to pass this year. However, it is clear through the current divide in states laws that it may be helpful to have an overarching federal scheme that sets guidelines on how companies can utilize these post-termination non-compete agreements that affect virtually all of the American workforce.