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FTC Seeks to Ban Noncompete Clauses

The FTC called noncompetes "an exploitative practice" negatively impacting wages, innovation, and new business creation.
FTC Seeks to Ban Noncompete Clauses

The Federal Trade Commission (FTC) is wading into the area of employment agreements as part of its aggressive posture on fighting unfair methods of business competition.

On Thursday, the commission voted to propose a rule that would ban employers from imposing noncompete agreements on their workers. In the press release, the FTC called noncompetes “a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.”

Noncompete agreements, or clauses within employment agreements, prevent a worker from working for competitor companies (for a set time or within the employer’s industry) during or after their current employment, according to the National Employment Law Center. The agreements are largely governed by individual states’ laws.

The FTC’s proposed rule would generally prohibit employers from using noncompete clauses. Specifically, the FTC’s new rule would make it illegal for an employer to:

  • Enter into or attempt to enter into a noncompete with a worker;

  • Maintain a noncompete with a worker; or

  • Represent to a worker, under certain circumstances, that the worker is subject to a noncompete.

More than 30 million workers — at least 18% of the U.S. workforce — are required to sign noncompetes as a condition to accepting a job, according to the National Employment Law Center.

The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid, said the FTC. It would also require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect. 

Companies use noncompetes for workers across industries and job levels, from hairstylists and warehouse workers to doctors and business executives, said the FTC. 

For CFOs, “aside from salary, bonus, and incentive compensation, the inclusion of a noncompete agreement in existing employment terms may be the single most important point to consider, as this could limit your choices for what is ‘next,’” according to a March 2016 CFO article

The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid, said the FTC. It would also require employers to rescind existing noncompetes and actively inform workers they are no longer in effect. 

Noncompetes harm competition in U.S. labor markets by blocking workers from pursuing better opportunities, and by preventing employers from hiring the best available talent, according to the FTC. 

“Research shows that employers’ use of noncompetes to restrict workers’ mobility significantly suppresses workers’ wages — even for those not subject to noncompetes, or subject to noncompetes that are unenforceable under state law,” said Elizabeth Wilkins, director of the FTC’s office of policy planning. “The proposed rule would ensure that employers can’t exploit their outsized bargaining power to limit workers’ opportunities and stifle competition.”

The FTC has recently sought to reinvigorate Section 5 of the FTC Act with enforcement actions. For example, it took action against a Michigan-based security guard company and its key executives for using coercive noncompetes on low-wage employees.

Blowback

The U.S. Chamber of Commerce called the attempt to ban noncompete clauses outright “blatantly unlawful.” The ban would overturn well-established state laws, the business lobbying group said.

“Since the agency’s creation over 100 years ago, Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule,” said Sean Heather, the Chamber’s vice president for international regulator affairs and antitrust.

In FTC Commissioner Christine Wilson’s dissenting statement on the notice of proposed rulemaking, she said the proposed Non-Compete Clause Rule represents “a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable in duration and scope, given the business justification for the restriction.”

Wilson said there is no clear evidence to support the rule. “What little enforcement experience the agency has with employee noncompete provisions is very recent (within the last week) and fails to demonstrate harm to consumers and competition.”

The proposed Non-Compete Clause Rule represents ‘a radical departure from hundreds of years of legal precedent.’ — Christine Wilson, FTC Commissioner

But an affirming statement led by Chair Lina Kahn said noncompete clauses block workers from switching to jobs that offer better pay and in which they would be more productive, and denies other workers the opportunity to replace them. “The collective decline in job mobility means fewer job offers and an overall drop in wages,” Kahn said.

Khan’s statement also noted that existing evidence shows noncompetes reduce innovation and competition in product and services markets by locking workers in place, “likely decreasing the flow of information and knowledge among firms.”

Though nearly all states allow noncompetes they often spark legal battles.

In 2015, more than 64,000 technology workers at companies such as Apple, Google, and Intel negotiated a $415 million settlement over allegations that their employers misused noncompetes to restrict their mobility.

In the fall of 2016, the Obama White House called on states that enforce noncompetes to bar companies from requiring low-wage workers to sign them and disallow noncompetes unless they are proposed before a job offer or significant promotion has been accepted.

Federal legislation proposed at the time, the Mobility and Opportunity for Vulnerable Employees (MOVE) Act, would have prohibited companies from requiring non-compete agreements for employees who make less than $15 an hour or $31,200 annually.

The FTC is soliciting comments on the newly proposed ban for 60 days after it’s published in the Federal Register.