FTC Proposes Rule Banning ‘Non-Compete’ Clauses

The Federal Trade Commission moved Thursday to make it easier for American employees to change jobs by banning “non-compete” clauses. 

The 3-1 vote(Opens in a new window) by the FTC’s four commissioners found that these common provisions in employment contracts represent an unfair form of competition—as in, the kind of problem the FTC was created in 1914 to address(Opens in a new window). It will now hold a public-comment process on its proposed rule(Opens in a new window) banning them.

Non-competes give a job a contractual afterlife, requiring that the employee agree not to work for a competitor or start a competing business for a defined period of time—often a year—and sometimes in a defined location. Breaking one can leave an employee on the receiving end of a lawsuit; fear of possible legal bills alone is enough to keep many workers in line. 

“By design, noncompetes often close off a worker’s most natural alternative employment options: jobs in the same geographic area and professional field,” FTC Chair Lina Khan wrote in a statement(Opens in a new window) joined by Commissioners Alvaro Bedoya and Rebecca Slaughter. “These restrictions can undermine core economic liberties, burdening Americans’ ability to freely switch jobs.”

The proposed rule estimates that non-competes today hinder about 30 million American workers, or one in five overall, and that banning them “would increase American workers’ earnings between $250 billion and $296 billion per year.” It would therefore ban employers from asking employees to accept non-compete clauses and require them to rescind existing non-competes by 180 days after publication of the finished rule.

Khan’s statement outlines three possible tweaks to the rule: whether it should cover senior executives, how it might apply to franchisors and franchisees, and how the FTC might affirm that employers can still use such alternative measures as confidentiality clauses or trade-secrets laws to protect their own investments. 

President Biden’s July 9, 2021 executive order(Opens in a new window) on competition policy—which has already pushed regulatory agencies to consider right-to-repair policies and led the FTC to request public input on its approaches to digital mergers—tasked the FTC to address non-competes. But Khan’s order notes that the commission had started taking a closer look at these provisions four years ago. 

Advocates of outlawing non-competes don’t have to point to other countries to cite potential benefits: California law bans them outright(Opens in a new window) as a restraint of trade, and the state’s courts consistently refuse to enforce them. 

Multiple economic studies (for instance, a 2005 paper(Opens in a new window) for the National Bureau of Economic Research) have found that the resulting freedom to change jobs and launch startups helped(Opens in a new window) make Silicon Valley more innovative and competitive. Other states have yet to take the hint and abolish non-competes, even as they’ve tried to position themselves(Opens in a new window) as a Silicon [fill in the blank]; the FTC’s action may now do them all a favor.