Federal Trade Commission Bans Non-Compete Agreements

On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a new rule to ban non-compete clauses, citing concerns about how such clauses harm workers and stifle competition. A non-compete clause in employment contracts is a contractual term between an employer and employee that generally prohibits the employee from working for a competitor, or starting a competing business within a certain geographic area and period of time, after the worker’s employment ends. While non-compete clauses were generally thought to apply only to high-level, white collar fields with executives who have access to sensitive corporate information, the reality is that such provisions are used across a broad array of industries, from fast food workers to hairstylists to factory managers. Most employees—regardless of education level—have a vague understanding of what a non-compete agreement is, and they are often asked to sign one after receiving a job offer with little chance left to negotiate. The FTC estimates that nearly 30 million people—or one out of every five American workers—are bound by a noncompete clause.

Current State of Non-Compete Clauses

In theory, non-compete clauses are supposed to safeguard employers by assuring that employees cannot take the valuable information they learned at one company and bring it to another, competing company. In practice, though, non-compete agreements tend to exploit workers, hinder innovation, and exacerbate racial and gender wage gaps. For example, workers have little bargaining power when subject to a non-compete agreement, so employers are able to suppress wages and generally have little incentive to compete for workers by offering higher pay or more favorable working conditions. Moreover, non-competes tend to hinder innovation by significantly limiting the pool of available people for hire. By preventing workers from starting their own businesses, coupled with the inability to hire qualified workers, non-compete agreements also tend to limit entrepreneurship and new business formation. Lastly, research has demonstrated that non-compete agreements exacerbate racial and gender wage gaps, finding that stricter non-compete agreement enforceability reduces earnings for female and non-white workers by nearly twice as much as for white male workers.

What the Federal Trade Commission Plans to Change about Non-Compete Agreements

So, what exactly would the FTC’s new proposal do? Well, the proposed rule would specifically provide that non-compete clauses are an “unfair method of competition” under Section 5 of the FTC Act, effectively prohibiting employers from including such clauses in employment contracts with employees who earn less than $15 an hour, or less than the median wage in their state. Moreover, for any existing non-compete clauses that currently bind employees, the rule would require employers to rescind such clauses and proactively notify workers, including those employees who are no longer with the company, that those provisions of their contracts are no longer in effect. With limited exceptions, the proposed rule would cover any person who works, whether paid or unpaid, for an employer, including interns, volunteers, and independent contractors. It should be noted, too, that the proposal does not foreclose the ability of companies to bind high-level executives to non-compete agreements. As FTC Chair Lina Khan has noted, the law recognizes that “the use of noncompetes to bind low-wage workers may be coercive and unfair in ways that the use of noncompetes to bind senior executives is not.” In the aggregate, though, the proposal generally forbids the enforcement of non-compete agreements is most employment contracts. The FTC is currently seeking public input on the rule during an open commenting period for sixty days, after which it would move to make the proposed rule final.

Potential Effects of the Federal Trade Commission’s Proposal

The FTC’s non-compete proposal, under the direction of Ms. Khan, is the latest attempt to rein in the power of large companies and provide more protection for workers. According to the FTC, the rule would increase workers’ earning by nearly $300 billion per year and double the number of companies founded by a former worker in the same industry (who was previously prohibited from doing so). In turn, the agency estimates that the proposal would expand career opportunities for roughly 30 million Americans. Intuitively, it makes sense that increased competition in the market—i.e., workers’ ability to decide for themselves, unrestrained, what to do with and where to take their labor—forces companies to provide more to ensure those workers remain satisfied in their current positions. The FTC’s new rule has the positive effect of addressing racial and gender wage gaps, with researchers predicting that getting rid of non-compete agreements nationwide would close racial and gender wage gaps by 3–9%. While the proposal has yet to take effect, the evidence that it would be beneficial for workers is clear. Without the anchor that formerly left many employees indefinitely tied down to their jobs, healthy competition and innovation in the market will thrive. And with that, higher wages, better working conditions, and economic liberty.

Do You Have Questions About Your Employment Contract?

If you are have questions about your non-compete agreement, non-solicitation agreements, or any other employment contract, reach out to The Noble Law employment contracts lawyers for a consultation in North Carolina and South Carolina.

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