Some noncompete clauses, which forbid departing workers from accepting employment or creating businesses in fields similar to the ones they are leaving, could become a thing of the past under a proposed Federal Trade Commission rule.
The clauses, which the FTC says effect 30 million U.S. workers, create an unfair impediment to employment hinder wage earning and violate Section 5 of the Federal Trade Commission Act, according to a preliminary finding by the commission.
“Research shows that employers’ use of noncompetes to restrict workers’ mobility significantly suppresses workers’ wages–even for those not subject to noncompetes, or subject to noncompetes that are unenforceable under state law," Elizabeth Wilkins, director of the FTC Office of Policy Planning, said in a press release. “The proposed rule would ensure that employers can’t exploit their outsized bargaining power to limit workers’ opportunities and stifle competition.”
The 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
- represent to a worker, under certain circumstances, that the worker is subject to a noncompete
Some in the funeral service industry use noncompete clauses, which can prevent licensed funeral directors from working in the same area as their previous employer or from opening a business that could be in direct competition. Some licensed funeral directors have hired counsel in attempt to break the clauses.
The commission, in the proposed rule, said the noncompete clause ban would not negate other restrictive clauses such as non-disclosure agreements and client or customer non-solicitation agreements.
The FTC argues that the banning of noncompete clauses could increase wages nationwide by up to $300 billion per year, but commission support for the proposed change is not unanimous.
“In addition to prohibiting employers from entering into noncompete clauses with workers starting on the rule’s compliance date, the proposed rule would require employers to rescind existing noncompete clauses no later than the rule’s compliance date,” the proposed rule states.
The rule would not affect noncompete agreements contained in negotiated contracts between the seller and buyer of a business.
Commissioner Christine S. Wilson voted against the proposal, saying that based “on the current record, non-compete clauses constitute an inappropriate subject for rulemaking” and would be open to legal challenges. There are “several hundred years” of precedent that establish the legality of noncompete clauses, Wilson said.
Commission Chair Lina M. Khan and Commissioners Alvaro M. Bedoya and Rebecca Kelly Slaughter, however, issued a statement saying that “the rulemaking authority we are exercising today is firmly rooted in the text and structure of the FTC Act and supported both by judicial precedent interpreting the scope of the law as well as further statutory language from the 1970s.”
Khan, Slaughter and Bedoya pointed to a FTC action against a Michigan security firm that, in an effort to enforce noncompete clauses, sued several guards who left the company for higher-paying jobs in the same field. In one case, the company, Prudential Security, pressured another firm to fire a worker that had left. The guards were making at or near minimum wage and were subject to noncompete clauses that banned them from working in the security field within 100 miles of Prudential.
Wilson, however, pointed out the FTC action against Prudential was announced only recently and there was no evidence to conclude that noncompete clauses “harm competition in labor markets.”
“In fact, the only litigated FTC case challenging a noncompete clause found that a noncompete provision covering franchise dealers did not violate Section 5 of the FTC Act,” Wilson said. “Notably, the NPRM omits any reference to this case.”
The FTC is seeking comment on the proposed rule change. Comments are due by March 10, 2023.