On January 5, 2023, the Federal Trade Commission (“FTC”) released a Notice of Proposed Rulemaking prohibiting employers from imposing non-compete agreements on their workers.

The proposed rule would not only make it illegal for an employer to enter or attempt to enter into a non-compete agreement with a worker but effectively rescind all existing non-compete agreements in effect. 

What Does the Proposal Entail?

Further, the employer would be tasked with notifying its workers who were previously subject to non-compete agreements that they no longer are. What is important, the FTC’s expansive definition of the term “worker” would include independent contractors and unpaid workers, in addition to traditional employees.

The FTC estimates that the proposed new rule could potentially increase wages by nearly $300 billion per year and expand the career opportunities for roughly 30 million Americans. In coming to this conclusion, the FTC claims that non-compete clauses reduce competition in labor markets as it suppresses earnings and opportunities for workers who are constrained by the non-compete agreement and those who are unconstrained.

They reason that workers constrained by a non-compete agreement are blocked from switching to higher-paying jobs, denying the opportunity for unconstrained workers to replace them. By restraining job mobility, the overall job market suffers since there are fewer job offers, resulting in an overall wage drop. Thus, firms have less incentive to compete for workers by offering higher pay, better benefits, or other more favorable conditions.   

The FTC contends that non-compete agreements prevent skilled workers from starting their own businesses while limiting the talent pool available for startups to hire. Further, the FTC argues that non-compete agreements reduce innovation and competition in product and service markets by decreasing the flow of information and knowledge among firms. Thus, product quality is reduced while prices are raised for consumers. 

Conclusion

This proposed new rule comes on the heels of a recent FTC decision to bolster its powers under Section 5 of the FTC Act, which allows the Commission to ban “unfair” methods of competition.

The FTC invites the public to submit comments on the proposed rule for review. The FTC will then review the comments and make any changes it deems necessary changes into a final rule.

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