The Federal Trade Commission has proposed a new rule that would ban employers from imposing noncompete clauses on employees.
According to the FTC, 30 million U.S. employees are covered by noncompetes, and that stopping this practice could potentially increase wages by nearly $300 billion per year. “Noncompetes 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,” said FTC Chair Lina Khan. “By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
“Noncompete clauses also hinder innovation and business dynamism in multiple ways—from preventing would-be entrepreneurs from forming competing businesses, to inhibiting workers from bringing innovative ideas to new companies,” the FTC stated in a press release. “This ultimately harms consumers; in markets with fewer new entrants and greater concentration, consumers can face higher prices—as seen in the health care sector.”
The FTC’s proposed rule would “make it illegal for an employer to enter into or attempt to enter into a noncompete with a worker; maintain a noncompete with a worker; or represent to a worker, under certain circumstances, that the worker is subject to a noncompete.” The proposed rule “would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also require employers to rescind existing noncompetes and actively inform employees that they are no longer in effect.”
The proposed rule generally would not apply to other types of employment restrictions, like non-disclosure agreements (NDAs). However, other types of employment restrictions could be subject to the rule if they are so broad in scope that they function as noncompetes, according to the FTC.
The Commission voted 3-1 to publish the Notice of Proposed Rulemaking (NPRM), the first step in the FTC’s rulemaking process. The NPRM aligns with the FTC’s recent statement to reinvigorate Section 5 of the FTC Act, which bans unfair methods of competition. According to the FTC, “noncompetes constitute an unfair method of competition and, therefore, violate Section 5.”
Commissioner Christine Wilson is the only one who voted against the proposed ban. “Based on the current record, non-compete clauses constitute an inappropriate subject for rulemaking,” Wilson wrote in a dissenting statement. “The competitive effects of a non-compete agreement depend heavily on the context of the agreement, including the business justification that prompted its adoption.”
The FTC is encouraging the public to issue comments on not only the proposed ban, but proposed alternatives to noncompetes. The public comment period will remain open through March 10, 2023. 
Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.