Editorial · January 16, 2023
Noncompete Agreements: What the FTC Proposed in 2023
Noncompete agreements may soon be banned across most of the United States. On January 5, 2023, the Federal Trade Commission (FTC) proposed a rule that would stop employers from using them. The rule is only a proposal. It is not final, and nothing changes for workers or employers today.
What is a noncompete agreement? It is a contract term that limits where a worker can go after leaving a job. The FTC's draft rule defines it as a term that prevents a worker from seeking or accepting a job with another company, or from running a business, after the job ends. Many workers sign one on their first day, often with little time to read it or ask for changes.
What the FTC proposed
The FTC voted 3 to 1 to publish a notice of proposed rulemaking. This is the first step in writing a federal rule. The proposal would make it illegal for an employer to do three things:
- Enter into, or try to enter into, a noncompete with a worker.
- Keep a noncompete in place with a worker.
- Tell a worker, in some cases, that the worker is bound by a noncompete.
The draft covers more than regular employees. It would apply to independent contractors, and to anyone who works for an employer, paid or unpaid. It would also reach noncompetes that were signed before the rule exists. Employers would have to cancel them and tell the worker in writing that they no longer apply. The draft sets a compliance date 180 days after a final rule is published.
Why the FTC says it wants a ban
The agency says noncompetes hold down wages, make it harder for people to start new businesses, and slow new ideas. It estimates that a ban could raise worker pay by nearly $300 billion per year and open up better career options for about 30 million Americans. FTC Chair Lina Khan said the freedom to change jobs is core to a competitive economy.
Not everyone agrees. Commissioner Christine Wilson voted no and wrote a dissenting statement. These are the FTC's own estimates, and the agency says it will read public comments before it decides on a final rule. Employers who use noncompetes often say they protect trade secrets and the training they pay for. Those arguments are likely to appear in the comments.
What the proposal would leave alone
The proposed rule is not a ban on every job restriction. The FTC says it would generally not apply to other restrictions, such as non-disclosure agreements. There is a catch, though. A restriction that is so broad that it works like a noncompete could still be covered.
The draft also has one exception. A noncompete would still be allowed when a person sells a business, or sells all of their ownership interest, and holds at least 25 percent of that business. Even then, the clause would remain subject to federal antitrust law and other laws. This keeps buyers able to protect what they paid for.
What state law says right now
For now, state law decides whether a noncompete can be enforced. The rules differ a lot from state to state. California is the strongest example. Its Business and Professions Code, section 16600, says that every contract that restrains someone from a lawful profession, trade, or business is void, except where the chapter allows it.
Other states allow noncompetes but add limits. Colorado passed a bill in 2022 that limits them to highly paid workers, and only when the clause protects trade secrets and is no broader than needed. Many other states let courts judge each case by its length, area, and purpose.
The FTC draft says it would replace any state law that conflicts with it. A state law would still stand if it gives workers more protection than the federal rule. So a final rule could change the picture in states with weak limits, while stronger state rules would stay in place.
What to do while the rule is pending
The public can send comments to the FTC until March 10, 2023. After that, the agency will review them and may change the rule before it votes again. A final rule could also face challenges, so the timing is uncertain.
In the meantime, a few plain steps make sense. Workers can read any noncompete before signing and ask what it covers, for how long, and in what area. Employers can review the agreements they use and ask whether each one is needed. Both sides can check their own state's rules first, since those apply today. A lawyer who knows the state can explain how a given contract would be treated. This post is general information, not legal advice.