Feds propose ban on noncompetes

Published Jan. 5, 2023 - HR Dive
Ryan Golden, Senior Reporter

Dive Brief:

The Federal Trade Commission proposed Thursday a rule that would prohibit employers and employees from entering noncompete agreements, stating that the agreements harm competition, suppress labor mobility and reduce wages even for those not bound by a noncompete agreement.
In the historic proposal, the FTC said other forms of restrictive covenants, such as nondisclosure agreements and client or customer nonsolicitaton agreements, would not be included in the law’s definition of a noncompete agreement. Employers would be required to rescind existing noncompete clauses and provide notice to workers that such clauses are no longer in effect. It would include a “limited exception” for noncompete clauses between the seller and buyer of a business.
Stakeholders will be permitted to make public comments on the proposal for a period ending 60 days after it is published on the Federal Register. A compliance date would be set 180 days after the publication of a final rule.

Dive Insight:

The FTC’s rule is perhaps the most significant federal regulatory decision thus far in 2023. The commission’s announcement comes more than one year after President Joe Biden issued an executive order encouraging it to ban or limit the use of noncompete agreements.

In a fact sheet accompanying the announcement, FTC estimated that eliminating noncompetes could increase employee earnings in the range of $250 billion to $296 billion per year. It also said the rule could address the agreements’ other impacts on innovation and worker mobility.

“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,” Lina Khan, FTC’s chair, said in a statement. “By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

Employer-side attorneys who spoke with HR Dive indicated that there may be several unanswered questions as the proposal moves further along the regulatory process.

In an interview, Dan Morgan, partner at Blank Rome, identified three questions raised by the FTC in its proposal for employers to consider:

Should franchises be covered by the rule’s prohibition of noncompetes?
Should the same prohibition be extended to senior executives?
Should the rule treat workers differently on the basis of their wage levels?

State and local government regulations of noncompetes have previously distinguished between employees on the basis of income. Illinois, for example, prohibits noncompete and nonsolicitation agreements with employees whose actual or expected earnings fall below $75,000 per year, with the threshold scheduled to increase in subsequent years.

As proposed, however, the FTC’s rule “is expressly displacing state law,” said Robert Milligan, partner at Seyfarth Shaw, a point that courts may take into consideration in future litigation of the rule, he added.

The proposal’s language regarding other forms of restrictive covenants presents additional questions. Previously, employer-side attorneys have suggested that employers may consider nonsolicitation agreements and NDAs as alternatives to noncompetes. While FTC indicated that such covenants would not be included under its noncompete definition, other portions of the proposed rule suggest that these other types of agreements also may function as “de-facto” noncompete clauses, “hence falling within the scope of the proposed rule.”

“There’s an alarming lack of focus and precision in the proposed rule, and maybe that’s the intent,” Milligan said.

Per Morgan, the proposal’s provisions requiring employers to rescind existing noncompete agreements, rather than grandfathering agreements made before the effective date of a new rule, is an “unusual” aspect. “I haven’t seen it before,” Morgan said of such requirements in the context of federal agency regulations.

Another point employers may seek clarity on concerns whether the FTC could make exceptions for agreements with certain types of employees who possess access to trade secrets or related information, Milligan said.