FTC proposes rule that would ban non-compete clauses

The US Federal Trade Commission, FTC, is proposing a new rule that would prevent companies from imposing non-compete clauses for workers that prohibit them from joining a competitor, typically for a period of time, after they leave their employ.

The proposed rule released on Thursday follows an executive order signed by United States President Joe Biden in 2021 targeting what he labelled anticompetitive practices in tech, healthcare and other parts of the economy. The order included a call for banning or limiting non-compete agreements to help boost wages.

The FTC proposal is based on a preliminary finding that non-compete clauses quash competition, in violation of Section 5 of the Federal Trade Commission Act. Section 5 bans unfair methods of competition.

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

The proposed rule would make it illegal for an employer to enter into, or attempt to enter into, a non-compete with a worker; maintain a non-compete with a worker; or represent to a worker, under certain circumstances, that the worker is subject to a non-compete.

It would apply to independent contractors and anyone who works for an company, whether paid or unpaid. It would also require employers to rescind existing non-compete clauses and actively inform workers that they are no longer in effect.

The proposed rule would generally not apply to other types of employment restrictions, like non-disclosure agreements, but other types of employment restrictions could be subject to the rule if they are so broad that they function as non-compete clauses.

The agency estimates that the new proposed rule could boost wages by nearly US$300 billion a year and expand career opportunities for about 30 million Americans.

AP