The Federal Trade Commission Proposes a New Rule Banning Noncompete Agreements
Do you utilize noncompete agreements in your business? According to the Federal Trade Commission (FTC), one in five American workers— approximately 30 million people— are bound by one. In light of that finding, the FTC’s new proposed rule banning noncompetes will undoubtedly have significant repercussions if it becomes effective.
As it stands now, the rule would ban employers from imposing noncompete agreements on their workers and would nullify any existing agreements. The FTC’s reasoning for the proposed rule is based on its finding that noncompete agreements harm the overall economy by limiting wages, putting a damper on innovation, and preventing the start of new businesses. The FTC’s findings further indicate that although noncompetes are widely used in a variety of industries, they often create a market of unfair competition that can be exploit workers. Based upon this, the FTC concluded that the agreements may violate Section 5 of the Federal Trade Commission Act, which bans unfair methods of competition. The FTC estimates that its newly proposed rule would increase the wages of American workers by a combined $300 billion per year and expand career opportunities for around 30 million people.
Noncompete agreements are often used to protect the interests of the employer by barring their employees from sharing their skills with a competing business. However, the FTC asserts that, in use, the agreements are preventing workers from freely changing jobs, dragging down their wages and working conditions, and limiting the talent available for hire. The FTC also found that noncompetes may prevent workers from pursuing better career opportunities and prevent businesses from hiring new skilled talent. Additionally, they can top talented individuals from sharing new, innovative ideas with other businesses or prevent workers from becoming entrepreneurs and starting their own businesses. Through implementing the new rule, the FTC hopes to make a difference for workers while also promoting innovation, healthier competition, and overall, fair business practices.
The FTC is proposing to make it illegal for an employer to enter into a noncompete agreement with an employee, to maintain any noncompete agreements, and/or to, at any point, relay that an employee is a party to a noncompete. The rule would apply to both independent contractors and employees. In addition to nullifying existing agreements, the rule would require that employers inform employees that they are no longer subject to them. The new rule would not apply to nondisclosure agreements or other restrictions of that type, but existing employment contracts may meet the criteria if they include noncompete wording.
Watch this space for future developments regarding this proposed rule.
The information presented here is for general educational purposes only. It does not constitute legal advice and does not create an attorney-client relationship.