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01/24/2023

FAQs About the FTC’s Proposal to Ban Non-Compete Agreements

Source: Fisher Phillips, January 23, 2023

When the federal government proposed a rule that would ban most non-competition agreements, many employers lined up with questions and concerns about the scope of the proposal and what it might mean for their day-to-day businesses. After all, non-competes have become a commonplace strategy for businesses of all types and sizes, and this rule would not only prevent employers from entering into new non-competes but would also require them to rescind those currently in place. The good news: we’re here to help. This Insight presents a series of frequently asked questions about all aspects of the proposal as developed by leaders of our Employee Defection and Trade Secrets Practice Group and will be updated as new developments occur in the coming months.

Big-Picture Overview

What happened?

The Federal Trade Commission (FTC) issued a proposed rule on January 5, 2023 that would prohibit employers from using non-compete clauses with workers. 

What does the proposed rule do?

The proposed rule, if adopted in its current form, would require employers to:

• rescind all existing non-competes no later than the rule’s compliance date (which is not yet determined); and
• provide notice to current and former workers that the workers’ non-compete clauses are no longer in effect. The proposed rule provides model language employers can use to satisfy this notice obligation.

How does the agency define “non-compete” clauses?

The proposed rule defines “non-compete clause” to mean a contractual term that blocks a worker from working for a competing employer, or starting a competing business, within a certain geographic area and period of time after the worker’s employment ends.  

Why did the FTC do this?

In July 2021, President Biden issued an Executive Order titled “Promoting Competition in the American Economy.” It directed the FTC to exercise its “statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” 

More than a year later, the agency followed through on the president’s request. With the release of the proposed rule, FTC Chair Lina Khan opined that non-compete clauses “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.” The agency further stated that it believes non-compete clauses negatively affect competition in labor markets by suppressing wages and labor mobility, and by preventing new businesses from forming, stifling entrepreneurship, and preventing novel innovation that might otherwise occur if workers were not restricted from sharing their ideas. The FTC estimates that the proposed rule would increase workers’ earnings in the U.S. by between $250 and $296 billion per year, and that the ban will close racial and gender gaps by 3.6 and 9.1%. 

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