Regulators propose rule that would ban non-compete clauses

The Federal Trade Commission is proposing a new rule that would prevent employers from imposing non-competition clauses on workers that prohibit them from joining a competitor, usually for a period of time, after they leave the company.

The proposed rule released Thursday follows a Executive Decree signed by President Joe Biden in 2021 targeting what he called anti-competitive practices in technology, healthcare and other sectors of the economy. The order included a call for a ban or limit non-competition agreements to help raise wages.

Non-compete agreements have become increasingly common in the workplace, with one estimate revealing that almost a third of companies require all their employees to sign non-compete agreements. States that have banned such agreements, such as Hawaii and Oregon, have seen the wages of the workers then increase.

“The freedom to change jobs is essential to economic freedom and a competitive and prosperous economy,” Chari Lina Khan said in a prepared statement. “Non-competition prevents workers from freely changing jobs, depriving them of higher wages and better working conditions, and depriving companies of a pool of talent they need to build and grow.”

The FTC’s proposal is based on a preliminary finding that non-competition clauses nullify competition in violation of Section 5 of the Federal Trade Commission Act. Article 5 prohibits methods of unfair competition.

The proposed rule comes a day after the FTC settled with three companies that forced their workers to sign non-compete clauses, including a Michigan-based security company that threatened minimum wage guards with a $100,000 penalty if they took a job with a competitor.

The new rule would make it illegal for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintaining a non-competition with a worker; or tell a worker, in certain circumstances, that the worker is subject to a non-competition clause.

It would apply to independent contractors and anyone working for a business, whether paid or unpaid. It would also require employers to rescind existing non-competition clauses and actively notify workers that they are no longer in effect.

The proposed rule would generally not apply to other types of employment restrictions, such as nondisclosure agreements, but other types of employment restrictions could be subject to the rule if they are so broad that they function as non-competition clauses. Nor would it apply to agreements between companies and their franchisees.

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


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