FTC Proposes Rule Banning Non-Compete Clauses Nationwide

Emily Zhang

Associate Editor

Loyola University Chicago School of Law, J.D. 2024

On January 5, 2023, the Federal Trade Commission (FTC) proposed a ban on the use of non-compete provisions in employment contracts. The ban would also require employers to nullify any existing non-compete clauses within six months of activation. The proposed rule applies to all employees and independent contractors, paid and unpaid workers, and businesses of all sizes and location. This is a far-reaching move that has the potential to raise wages and increase competition among businesses.

Reasoning behind the ban

 The FTC has been signaling an end to non-compete clauses, especially after the Biden Administration encouraged the FTC to consider getting rid of non-compete clauses and no-poaching agreements among companies. About one in five American workers—approximately 30 million people—are bound by non-compete clauses which restrict them from pursuing potentially better employment opportunities and prevents workers from easily leaving their jobs.

Many economists believe that the existence of non-competes explain why the pay for middle-income workers has stagnated in recent decades. They appear to directly affect around twenty to forty percent of U.S. workers in the private sector, and keep wages down because changing jobs is one of the ways of securing a raise.

The FTC’s press release on the proposed ban reasons that the use of non-compete agreements result in suppressed wages, less innovation, and difficulties for entrepreneurs to start new businesses. Several states and territories have already enacted bans or prohibitions on the use of non-competes for workers who earn less than a statutory threshold. Among these states are California, Washington, D.C., North Dakota, Oklahoma, Illinois, Maryland, Virginia, and Washington.

Requirements and exceptions

 The proposed rule prohibits an employer from: 1) entering into or attempting to enter into a non-compete agreement with a worker; 2) maintaining a non-compete agreement with a worker; or 3) representing to a worker that they are subject to a non-compete without a good faith basis to believe that the worker is subject to an enforceable non-compete. The proposed rule would generally not apply to other types of employment restrictions like non-disclosure agreements.

There is, however, one exception: the rule will still allow for an agreement that restricts competition when a person is selling a business entity, or otherwise disposing of all their ownership interest in the business entity, or when a person is selling all (or substantially all) of a business entity’s assets. When a substantial owner (holding at least 25 percent ownership interest in a business entity) is restricted, a non-compete could be permissible.

Currently the FTC’s suggest rule is merely a proposal, as the Commission voted 3-1 to publish the Notice of Proposed Rulemaking. The final rule would be administered and enforced by the FTC, but complainants can currently file a complaint or request for Commission action through the FTC’s website or by a signed statement filed with the Office of Secretary.

Potential legal issues

 The general ban also applies to de-facto non-compete clauses like contractual provisions or policies, which has sparked legal controversy. In her dissenting vote, Commissioner Christine S. Wilson issued a statement outlining three potential legal challenges to the final rule: 1) the Commission lacks authority under the FTC Act to engage in unfair methods of competition rulemaking; 2) the Commission’s authority to promulgate the non-compete clause rule is susceptible to challenge under the major questions doctrine; and 3) if the Commission does possess such authority, it could be an impermissible delegation of legislative authority.

What businesses should do to prepare

This is the first step in the FTC’s rulemaking process and although there is a chance that the non-compete ban will not survive the implementation process after public backlash or potential legal challenges, employers should prepare to take the necessary steps in reviewing their existing policies. Employers should consider auditing their employment contracts for non-compete clauses and possible non-compete provisions, assessing the scope of each. Additionally, an assessment of the purpose of existing non-competes would be beneficial in the context of their business structure and strategy. Employers should plan to adjust accordingly, whether it is drafting a new non-disclosure clause to protect confidential information, reviewing hiring practices, or consulting with legal counsel to understand how it can protect their privacy interest within the limits of federal law.