What the proposed ban on noncompete clauses means for you

Job hunting is widely considered the best way to improve your career prospects and salary.

Sometimes, non-compete clauses get in the way. These contracts are intended to protect the investments companies have made in 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.

The US Federal Trade Commission recently proposed a new rule banning the use of non-compete clauses in employee contracts, which suppresses wages, stifles innovation and prevents entrepreneurs from starting new businesses, the agency said.

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The proposed rule would also require companies with existing non-compete agreements to cancel them and inform current and former 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 widely, but virtually without exception.”

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

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

Non-competes are increasingly used in industry

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“Non-competes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool they need to build and expand,” said the president of FTC Lina Khan in a statement.

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

A report by the White House and the US Treasury Department found that 15% of workers without a college degree are subject to non-compete agreements, as are 14% of workers earning less than $40,000.

A ban could raise wages by nearly $300 billion a year and narrow the wage gap between white and minority workers, as well as between men and women.

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

Non-competes degrade wages and working conditions by eliminating one of the most effective tools workers have to improve their quality of work – protecting 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 on unsuspecting workers at all income levels and job titles,” Farley said.

“Non-competes degrade wages and working conditions by eliminating one of the most effective tools workers have to improve their quality of work – protecting or moving to a better job.”

“When used properly, non-compete agreements are an important tool in fostering innovation and preserving competition,” Sean Heather, the US Chamber of Commerce’s senior vice president for international regulatory and antitrust affairs, said in a statement.

An outright ban is “illegal space,” Heather said. “Congress has never delegated to 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 takes effect, including “inevitable litigation” challenging the FTC’s authority, Schmidt warned.

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

What should employees do now?

Thomas Barwick | Getty Images

Workers who are affected by noncompetes should submit comments to the FTC on the proposed rule, Farley advised.

The comment period is open until 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 harm 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 a build-up of momentum toward that,” Dryden said. In fact, many states already have restrictions on non-compete agreements, and it’s not surprising that 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 need to be aware that this is a real risk,” Dryden said.

For now, “use this as a reason to look, as an organization, at how you’re protecting your business,” Schmidt advised. There may be other contracts, such as non-disclosure agreements or non-solicitation agreements, that can serve the same purpose.

“Even if this FTC rule does not ultimately survive, state and local governments are becoming more active,” he said.

“We’re going to continue to see this trend of restrictions and limitations either by state legislatures or by state attorneys general.”

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