Federal Trade Commission Proposed Rule on Non-Compete Clauses

Background On January 5, 2023, the Federal Trade Commission released a Notice of Proposed Rulemaking (NPRM) to prohibit employers from imposing noncompete clauses on workers. True to their name, non-competes block people from working for a competing employer, or starting a competing business, after their employment ends. Evidence shows that noncompete clauses bind about one in five American workers, approximately 30 million people. By preventing workers across the labor force from pursuing better opportunities that offer higher pay or better working conditions, and by preventing employers from hiring qualified workers bound by these contracts, non-competes hurt workers and harm competition.

Proposed Rule on Noncompete Clauses

Based on concerns about these harms to workers and to competition, the FTC has proposed a rule concerning non-competes.

• The rule would provide that noncompete clauses are an unfair method of competition. As a result, the rule would ban employers from entering noncompete clauses with their workers, including independent contractors.
• The rule would require employers to rescind existing noncompete clauses with workers and actively inform their employees that the contracts are no longer in effect.
• In the proposed rule, for which the agency invites comment, the FTC estimates that the rule would: o Increase workers’ earnings by nearly $300 billion per year o Save consumers up to $148 billion annually on health care costs o Double the number of companies founded by a former worker in the same industry
• The proposed rule seeks public comment on a number of topics, in particular: o Whether franchisees should be covered by the rule o Whether senior executives should be exempted from the rule, or subject to a rebuttable presumption rather than a ban o Whether low- and high-wage workers should be treated differently under the rule