The Federal Trade Commission (FTC) has proposed a ban on non-compete clauses, calling them “a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.”
If you’re thinking that’s some strong, broad language, particularly from the FTC, the U.S. Chamber of Commerce agrees. That very same day, the U.S. Chamber released a statement calling the FTC’s proposed ban on non-compete clauses “blatantly unlawful,” adding that “since the agency’s creation over 100 years ago, Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule. The Chamber is confident that this unlawful action will not stand.”
The FTC claims an estimated 18% of U.S. workers are covered by non-competes, which equals roughly 30 million people. What’s the problem? The agency asserts non-competes subject these workers to unfair competition, hindering worker wages to the tune of nearly $300 billion and slashing the number of companies in the same industry founded by a former worker by half. It’s currently seeking public comment on the proposed rule. The U.S. Chamber, however, has threatened to sue the federal government over the proposal because it contends that the FTC lacks the authority to put a ban on non-compete clauses.
Amy Beckstead, employment attorney at Beckstead Terry Ditto PLLC, agrees that the move is extraordinary due to how broad it is. She points out that it could even include non-solicitation agreements if those agreements are viewed as overly broad under the proposed rule.
The FTC itself states that the proposed rule “would generally prohibit employers from using non-compete clauses” and specifically would make it illegal for an employer to:
- Enter into or attempt to enter into a non-compete with a worker.
- Maintain a non-compete with a worker.
- Represent to a worker, under certain circumstances, that the worker is subject to a non-compete.
“The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also require employers to rescind existing non-competes and actively inform workers that they are no longer in effect,” the FTC adds.
The only exception in the proposal includes a seller or buyer of a business if the restricted party is an owner, member, or partner holding at least a 25% ownership interest in a business entity. However, the FTC admits that it is looking for public comment on specific areas, which, as history tells us, might be worked into a final rule that isn’t as broad as it reads today. Those areas include:
- Whether franchisees should be covered by the rule.
- Whether senior executives should be exempted from the rule, or subject to a rebuttable presumption rather than a ban.
- Whether low- and high-wage workers should be treated differently under the rule.
In the meantime, what can be said for certain is A) that the proposal isn’t set in stone yet, but B) there are at least 10 states and counting that already restrict or have a ban on non-compete clauses.
“We are in a holding pattern as we wait to see what the FTC’s final rule may be,” states Beckstead. “But, especially for companies with employees outside of the state of Texas, this is great time to double-check that the non-competition and non-solicit agreements in place with these out-of-state employees are legal and enforceable.”