FTC Proposes Significant Change Regarding Non-Compete Clauses
On January 5, 2023, the Federal Trade Commission (FTC) released a notice of proposed rulemaking (NPRM) that would prohibit employers from imposing a noncompete clause on workers. The FTC found that noncompete clauses harm competition by reducing wages and stifling innovation. The NPRM was proposed on the same day as the FTC entered orders barring a security guard company and a glass manufacturer from enforcing noncompetes against their workers.
Noncompete clauses typically prohibit workers from going to work for a competing business, or starting a competing business, after their employment ends. Three states – California, North Dakota and Oklahoma – already prohibit noncompete clauses. Several other states impose limits on noncompetes, especially for lower paid workers. For example, the Illinois Freedom to Work Act prohibits covenants not to compete for workers earning less than $75,000, and requires that the employee be informed about the noncompete before it is signed.
The FTC’s proposal would go beyond the requirements of Illinois law. The FTC would prohibit all noncompetes regardless of the level of compensation. It would apply to anyone working for an employer, including not only employees but also independent contractors and volunteers. The only exception would be a noncompete that is entered into by an owner of business selling his/her ownership interest or the business’s assets (for example, a physician selling his/her practice). Franchise owners also can be subject to a noncompete.
In the FTC’s fact sheet explaining its reasons for the NPRM [1], the FTC stated that the proposed rule could increase workers’ earnings by $250 to $296 billion per year, and help close racial and gender wage gaps. The FTC also claims that noncompete clauses hinder innovation and increase costs, calling out the health care sector in particular. The FTC states that “In markets with fewer new entrants and greater concentration, consumers face higher prices – as seen in the health care sector.” The FTC estimates that the proposed rule would save consumers up to $148 billion annually in health care costs.
The NPRM faces a long road ahead before it becomes enforceable. It has not yet been published in the Federal Register. Once that takes place, there will be a 60 day public comment period during which comments can be submitted for the FTC’s consideration. The FTC invited comments in several areas, including whether senior executives should be exempted and whether low- and high-wage workers should be treated differently. If the rule becomes final, legal challenges will likely follow.
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[1] https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete_nprm_fact_sheet.pdf