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The U.S. Federal Trade Commission's proposed blanket ban on noncompete agreements will affect businesses as soon as the draft rule is finalized as law, something expected to happen this year. It is a sweeping proposal requiring employers to tear up existing employee noncompetes and offers no room to write new ones, even for the highest-paid workers.
It requires employers to rescind existing noncompetes "and actively inform workers that they are no longer in effect."
The proposal bans all noncompetes, including those required of high-wage workers who know trade secrets and client lists. The FTC pointedly said the ban won't apply to nondisclosure agreements but also warned employers from developing employee contracts "so broad in scope that they function as noncompetes."
"Of all the possible directions they [FTC] could have gone, this is the boldest possible," said Evan Starr, associate professor of management and organization at the University of Maryland's Robert H. Smith School of Business and a leading researcher on noncompete agreements.
Evan Starr Associate professor, University of Maryland's Robert H. Smith School of Business
The proposal doesn't have carve-outs for occupations or income thresholds. Washington, D.C., for example, bans noncompetes for workers who make less than $150,000 annually. The FTC "decided that noncompete agreements were unfair methods of competition," Starr said.
The FTC will soon start a 60-day public comment period on the proposal and finalize the law sometime this year.
The proposed noncompetes ban, sought by President Joe Biden, is likely a consequence of the growth of these labor clauses. The administration argued that many workers, including those in construction and retail, are being asked to sign labor contracts with noncompete agreements, making it harder for them to get a better job. The FTC estimates that ending noncompetes could increase wages by nearly $300 billion annually and expand career opportunities for millions of workers.
But Mark Kluger, employment attorney and founding partner at Kluger Healey, a law firm in New Jersey, said the FTC's proposal would hurt businesses.
"While the FTC touts the intent of this proposed rule as being all about supporting an employee's freedom to work anywhere and do anything, the agency seems to care nothing about the equally important freedom of employers to enter into and enforce contracts that protect the integrity of their businesses," Kluger said.
He added that there "are many good reasons for employers to be able to restrict high-level employees with intimate knowledge of proprietary information from being able to immediately move to a competitor."
Businesses have been fighting efforts to roll back noncompetes in various states, arguing that the agreements are necessary to protect trade secrets, innovative technologies, client lists and other types of proprietary information.
Controversy over noncompetes increased as their use expanded to lower-wage workers. The government estimates that about 1 in 5 workers, or about 30 million people, are bound by noncompete agreements.
The FTC took this step in a 3-1 vote, with Christine Wilson, appointed by President Donald Trump in 2018, opposing.
"The proposed Non-Compete Clause Rule represents a radical departure from hundreds of years of legal precedent," Wilson said in a statement. She added that there was a "lack of clear evidence" to support the rule.
But FTC Chair Lina Khan, alongside fellow FTC commissioners Rebecca Slaughter and Alvaro Bedoya, said in a statement that noncompete clauses "reduce competition in labor markets, suppressing earnings and opportunity even for workers who are not directly subject to a noncompete."
Patrick Thibodeau covers HCM and ERP technologies for TechTarget Editorial. He's worked for more than two decades as an enterprise IT reporter.