FTC Proposes Ban on Worker Non-Compete Clauses

The Federal Trade Commission proposed a rule banning non-compete clauses, contracts which prevent workers from joining competing companies after they leave their job, on Thursday morning. The agency stated that non-compete clauses harm healthy competition in the labor and product markets and block entrepreneurship, and estimated that the rule could increase workers’ earnings by almost $300 billion per year.

“There's a whole raft of economic evidence that now documents the ways in which these non-compete clauses undermine competition,” said Lina Khan, the chairperson of the FTC, in a press conference. “Around one in five American workers are now bound by a non-compete, and a significant body of research shows that non-competes reduced wages overall. They don't just reduce wages for the workers that are directly subject to a non-compete, but they actually have a market-wide effect, which is quite striking.”

Employers frequently use non-compete clauses to lock their workers into place by prohibiting them from engaging in any kind of competition with the employer. That means the employees are often not allowed to work for competing companies after leaving their jobs, usually for a period of a year or limited to a geographic area. They are also often not allowed to start businesses that directly compete with their former employers. 

The new rule, however, would make it fully illegal for employers to enter into or maintain non-compete agreements with their workers, and require them to actively notify workers that any existing non-compete agreements would no longer be in effect. 

“Workers that are currently stuck in place, effectively, would be able to freely move to another job,” Khan said. “I would think that would basically force employers to compete more vigorously over workers in ways that should lead to higher wages, that should lead to improved working conditions.” 

“More generally, research has shown that labor markets have become much more concentrated,” she continued. “Employers are able to use the fact that they have labor market power over workers to more easily effectively coerce workers into accepting these contractual terms. Removing [non-compete clauses] could help promote more competition in ways that could potentially chip away at that.”

The proposed rule would generally not apply to other contract restrictions like non-disclosure agreements, unless the restrictions were “so broad in scope that they function as non-competes,” the FTC said in a press release. 

“We're not talking about your run-of-the-mill NDA,” said Elizabeth Wilkins, the director of the FTC Office of Policy Planning. “This isn't a rule that's meant to cover things like that. But there is a set of state court cases that can make these findings. For example, trading repayment agreements where the penalties are so out of line with the actual trading investments that one would expect that you suspect something else is going on.”

In mid-2021, President Biden issued an Executive Order on promoting competition in the economy, in which he encouraged the FTC to examine non-compete clauses. Khan said that two main factors had contributed to the FTC’s decision to act now. Firstly, non-compete agreements have become much more common in all kinds of workplaces. Secondly, states had more frequently taken legislative action to curb or fully ban non-completes. 

“That's created this natural experiment where you have different states approaching this issue in different ways,” she said. “We've seen a flourishing of a lot of economic, empirical research and scholarship that now is letting us make these findings more definitively about harms to competition in labor markets, harm to competition in product and service markets.”

The FTC recently made a statement on its plan to reinvigorate Section 5 under the Federal Trade Commission Act, which bans unfair labor competition. This proposed rule is one of the agency’s first actions towards that plan. Khan said that, though “it's no secret that the FTC generally is under-resourced,” she believes the rule will help provide legal clarity for states who decide to pursue companies using non-compete clauses. 

“I'm really excited about this rule and see it as an important first step,” Khan said.

This is the first step in the FTC’s rule-making process. The agency is now seeking public comments regarding the rule, and may make changes to the final text of the rule based on the public’s response.