The FTC’s Proposed Ban on Noncompete Agreements: What Should Employers Do?

A 200-year-old mainstay of many employment agreements could soon be a thing of the past.

In January, The Federal Trade Commission proposed a sweeping, national ban on noncompete agreements, which allow employers to bar employees from taking jobs with competing companies during their employment and for a certain time period after their employment ends. The move, which is still in the proposal phase, comes as the FTC has made a preliminary determination that noncompetes constitute an unfair method of competition and violate Section 5 of the Federal Trade Commission Act.¹

It’s estimated that more than 30 million workers — or roughly 18% of the U.S. workforce — are required to sign a noncompete before accepting a job.²

If the rule is adopted as proposed, employers of all sizes – for-profit or non-profit – will no longer be able to impose noncompetes on their workers (including independent contractors, externs, interns, volunteers, or apprentices), regardless of their salary level. And it would apply retroactively, making existing noncompete agreements unenforceable.

Specifically, the proposed rule would ban entering into, attempting to enter into, or maintaining a noncompete with a worker, or committing a worker to a noncompete under certain circumstances. The only exceptions: noncompete clauses could still be used in the sale of a business, between seller and buyer, when the restricted party is a “substantial owner” in the business being sold, holding at least 25% ownership. The proposed rule also allows noncompetes to continue to be used in agreements between franchisors and franchisees. Other types of employment restrictions, such as non-disclosure agreements, will also still be allowed.

The FTC may end up narrowing the application of the proposed rule to a subset of workers based on such factors as occupation, function, or wages. This narrower prohibition may allow noncompetes for a limited number of high-wage workers while banning them for low-wage employees.

If, however, the proposed rule passes, employers would be required to come into compliance 180 days after the final rule is published, rescind existing noncompete provisions by the compliance date, and notify all impacted workers within 45 days of that date.

Pros and cons

Opponents of the ban say the proposal is too broad and the agency exceeded its authority. Some argue that the proposal also fails to address employers’ legitimate concerns about protecting their training and proprietary information as employees move to other jobs. When appropriately used, they say, noncompete agreements are an important tool in fostering innovation and preserving competition.

Proponents of the proposal welcome the move to increase wages and promote economic development in states that don’t already limit or ban noncompetes. The FTC says that ending noncompetes could increase wages by nearly $300 billion per year and expand career opportunities for 30 million workers. According to FTC Chair Lina M. Khan, “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.” Further, many members of the public have supported the rule proposal, several of whom have commented favorably during the public comment period which ends on April 19, 2023.³

Given the variables and complex nature of these proposed actions, it would be wise for employers to review their practices and options with experienced employment lawyers, as discussed below.

Employers need to be prepared

Although the proposal has yet to take effect, and may be modified in the interim, employers can act now by:

• Conducting a noncompete “audit” – including analyzing the breadth of confidentiality and nonsolicitation clauses and tightening up trade secret protection plans. This is the best way to protect against legal risk and avoid either under- or over-reacting to the FTC’s action.
• Deciding whether a “full” noncompete clause is needed or whether a confidentiality, nonsolicitation, or nondisclosure agreement – which courts tend to view more favorably than straight noncompetes – might be sufficient to protect legitimate competitive interests. Agreements with employees should be reasonable and narrowly focused to protect trade secrets and confidential information, as opposed to including provisions that simply keep an employee from working.
• Taking advantage of the FTC's comment period (which ends on April 19) and letting their voices be heard if the proposed law would do harm to their legitimate business interests.

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  1. See https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition ^↩
  2. White House, Fact Sheet: Executive Order on Promoting Competition in the American Economy (July 9, 2021) ^↩
  3. https://www.regulations.gov/docket/FTC-2023-0007/comments?pageNumber=2 ^↩