What Employers Should Know About the Federal Trade Commission’s Plan to Outlaw Most Noncompetition Agreements

Earlier this month, and for the first time, The Federal Trade Commission (FTC) took legal action via Section 5 of the FTC Act, against two individuals and three companies, compelling them to drop noncompete provisions. Citing the policy statement on “unfair competition,” the FTC further announced a proposed rule to ban employers from imposing noncompete provisions on employees. The ruling is intended to protect hourly and salary workers alike.

The FTC noted that noncompete agreements keep workers from seeking higher paying jobs and better working conditions. According to Rahul Rao, Deputy Director of the FTC’s Bureau of Competition, “the FTC is committed to ensuring that workers have the freedom to seek higher wages and better working conditions without unfair restrictions by employers” and “will continue to investigate, and where appropriate challenge, noncompete restrictions and other restrictive contractual terms that harm workers and competition.”

The proposed rule basically stops employers from using noncompete clauses and would make it illegal for an employer to enter—or attempt to enter—into a noncompete with a worker, to maintain a noncompete with a worker, or to represent to a worker, under certain circumstances, that the worker is subject to a noncompete. The rule also would apply to independent contractors and anyone who works for an employer, whether paid or unpaid, and it would require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect.

In most circumstances, nondisclosure agreements are not affected by the ruling. However, other types of worker restrictions believed to be too broad may be seen to function as noncompetes and be subject to the rule. Furthermore, the proposed rule does not apply to an individual selling a business when the restricted person has a substantial interest in the business entity at the time of the agreement.

The proposed rule is not without opponents, as Commissioner Christine S. Wilson issued a Dissenting Statement and The U.S. Chamber of Commerce called out the rule as “blatantly unlawful.”  

While the FTC’s proposed approach to confronting noncompete clauses may face court tests, the time is now for employers to begin a proactive inspection of their current noncompete practices.