FTC Proposes Ban on Non-Compete Agreements

By Ryan A. Hancock, Esquire

On Jan. 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking indicating that it seeks to ban employers from imposing or enforcing non-compete agreements on their workers. The proposed rule would apply to all workers, including independent contractors, whether paid or unpaid.

The FTC preliminarily found that such “agreements” – referred to as restrictive covenants – negatively affect competitive conditions by suppressing working conditions, hampering innovation, and restricting the freedom to change jobs or to start new businesses. Further, the FTC estimates that the proposed rule could collectively increase wages by nearly $300 billion per year.

A non-compete clause is a contractual provision that prevents workers from being employed by a competing employer, or from starting a competing business, typically within a certain geographic area and during a specified period of time after the worker’s employment ends. Approximately 1 in 5 U.S. workers – 30 million people – regardless of salary, wage, and profession, currently are bound by non-compete clauses.

To date, only three states (California, North Dakota, and Oklahoma) have declared non-competes to be invalid in all forms. In other states (Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, and Washington), non-competes are prohibited unless the worker earns above a certain threshold. In most other states, including Pennsylvania, courts have traditionally reviewed non-compete clauses more thoroughly and with more scrutiny than other contractual terms because of the unequal bargaining power between employers and employees and the hampering effects of non-competes on an individual’s ability to practice their trade. Even in states where a court would find a non-compete to be unenforceable, employees are about as likely to have signed a non-compete as workers in other states, and are just as likely to be dissuaded from seeking or accepting another job because they may not know that the non-compete is unenforceable.

The FTC therefore finds that federal action is appropriate and necessary because the Federal Trade Commission Act declares “unfair methods of competition” to be unlawful. The FTC seeks comments on the proposed rule or any viable alternatives, including whether senior executives should be subject to a different standard than non-executive level employees. The FTC seeks comments through March 10, 2023. As labor and employment lawyers that represent working people, we at Willig, Williams & Davidson applaud the FTC’s proposed action and encourage all workers to demand that their elected officials prioritize the elimination of non-competes.