FTC Proposes Rule to Ban Noncompete Clauses

The Federal Trade Commission proposed a new rule potentially banning employers from imposing noncompetes on their workers. By stopping this practice, the agency estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.

Massachusetts already restricts the use of noncompetes in many instances. The FTC’s position is that its rulemaking would supersede state law.

What is a non-compete?

As background, non-compete agreements are a contractual way for an employer to restrict an employee or former employee from working for a competitor. An agreement might require an employee to refrain from working in a particular industry for a period of time after leaving his or her job, perhaps for a year. The rationale is aimed at preventing a worker from jumping ship to go to a competing business, or to start his or her own new company based on the company’s established model. If a non-compete agreement is not honored, a company has the legal option to sue a former employee.

The FTC is seeking public comment on the proposed rule, which is based on a preliminary finding that noncompetes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act. The FTC will review the comments and may make changes, in a final rule, based on the comments and on the FTC’s further analysis of this issue. The comment period is open through Mar 10, 2023.

What does the rule mean?

The FTC’s proposed rule would generally prohibit employers from using noncompete clauses. Specifically, the FTC’s new 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; or
  • represent to a worker, under certain circumstances, that the worker is subject to a noncompete.

Who does it apply to?

The proposed rule would apply to independent contractors and employees, interns and other individuals who work for an employer whether paid or unpaid. It would also require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect. Noncompetes would be allowed in the instance of a sale of a business, and a former business owner who sold his business could be restricted from competing with the business for some period of time. 

The proposed rule would generally not apply to other types of employment restrictions, like non-disclosure agreements. However, other types of employment restrictions could be subject to the rule if they are so broad in scope that they function as noncompetes.