The U.S. Federal Trade Commission (FTC) recently proposed a rule to prohibit the use of non-compete agreements by employers in almost all circumstances as an unfair method of competition, and is seeking public comment on the proposed rule. The FTC’s action was a response to an executive order on promoting competition in the U.S. economy issued by President Biden in July 2021.
An estimated 30 million (or 18%) of all U.S. workers are subject to non-compete restrictions, a percentage that is much higher for engineers, IT/computer and other technical professionals.
“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC Chair Lina M. Khan. “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. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation and healthy competition.”
According to the FTC, elimination of non-competes will help stop widespread and often exploitative practices that suppress wages, hamper innovation, and block entrepreneurs from starting new businesses. The agency estimates that the new proposed rule could increase wages by nearly $300 billion per year, and expand career opportunities for about 30 million Americans. The FTC also projects the ban would help close racial and gender pay gaps, save consumers more than $148 billion in health-related expenses each year, and double the rate of company creation in the same industry by former employers, increasing employment opportunities.
Non-compete clauses are agreements that prohibit an individual from working for a competing company or starting their own business in the same industry for a certain period of time after leaving their current employer. These clauses are commonly used in employment contracts, particularly in industries such as technology and finance.
FTC’s proposed rule would generally prohibit employers from using non-compete clauses and 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
The proposed rule would also apply to independent contractors and anyone who works for an employer, whether paid or unpaid. Employers would be required to rescind existing noncompete agreements with notice to their employees. The draft rule also leaves open the door to FTC scrutiny of employer non-disclosure agreements and other employment restrictions if they are so broad in scope that they function like noncompete agreements.
A number of states have taken action in recent years to limit or ban the use of non-compete clauses:
- California prohibits the use of non-compete clauses in employment contracts, with a few exceptions such as protection of trade secrets.
- Oregon prohibits non-compete clauses for employees earning less than $75,000 per year.
- North Dakota prohibits non-compete clauses that are longer than two years.
- Oklahoma prohibits non-compete clauses that are longer than two years and restrict the type of work that can be restricted.
- Massachusetts limits the enforceability of non-compete clauses to 12 months after the employee has left the company, and requires that the non-compete clause be reasonable in terms of duration, geographic scope, and the type of work that is restricted. IEEE-USA assisted the IEEE Massachusetts Sections in supporting adoption of the Massachusetts non-competes law.
- Utah, Idaho and Colorado restrict the enforceability of non-compete clauses, but also gives state courts the discretion to enforce them if they are deemed reasonable and necessary to protect an employer’s legitimate business interests.
Public comments are requested on the proposed FTC rule by 10 March 2023.
For more information on the FTC’s action, see: https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition
To review and comment on the proposed rule, go to: https://www.regulations.gov/docket/FTC-2023-0007/document
