Regulators said Thursday that they want to make it illegal for American employers to put noncompete clauses into employment contracts—a proposal that businesses slammed as “blatantly unlawful.”
The Federal Trade Commission (FTC)—which regulates and enforces competition law in the U.S.—unveiled a proposal on Thursday to ban employers from imposing noncompete clauses on workers, saying the practice is harming competition within the American labor market by preventing companies from hiring the best available talent.
What is a noncompete clause?
A noncompete agreement is a term in an employment contract that prohibits employees from competing with a business for a specific duration of time after their employment has ended.
This can stop employees from working for a competitor company or individual; starting a business that offers the same product or service as their employer; or developing competing products.
Companies across industries use the clauses for workers at various career levels, from warehouse workers and hairstylists to corporate executives.
What’s the issue?
Labeling the widespread practice “exploitative,” the FTC argued that noncompetes “suppress wages, hamper innovation, and block entrepreneurs from starting new businesses.”
“By stopping this practice, the agency estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans,” the watchdog added.
Under its proposed ban, it would become illegal for employers to enter into or attempt to enter into a noncompete with a worker, maintain a noncompete with a worker, or suggest to workers that they are subject to a noncompete.
The rules would apply to anyone—paid or unpaid—who works for a company, including independent contractors. Employers would also be required to rescind existing noncompetes and inform their staff that the clauses are no longer in effect.
Elizabeth Wilkins, director of the FTC’s Office of Policy Planning, said in a statement on Wednesday that research had proved noncompetes “significantly suppress workers’ wages.”
“The proposed rule would ensure that employers can’t exploit their outsized bargaining power to limit workers’ opportunities and stifle competition,” she said.
Meanwhile, FTC Chair Lina M. Khan argued that the freedom to switch jobs was “core to economic liberty.”
“Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand,” she said in a statement. “By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
The watchdog is seeking public opinion on the proposed rule, which it said was based on a preliminary finding that noncompetes violate the Federal Trade Commission Act by acting as an unfair competition method.
FTC’s proposal ‘will not stand’
Corporate America was quick to respond to the FTC’s proposed noncompete ban, with the U.S. Chamber of Commerce—the world’s largest business organization—issuing its own statement on Thursday to vocalize its opposition to the suggestion.
Sean Heather, the organization’s senior vice president for international regulatory affairs and antitrust, insisted that an outright prohibition of noncompete clauses in all employment contracts was “blatantly unlawful.”
“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,” he said. “The Chamber is confident that this unlawful action will not stand.”
He argued that when appropriately used, noncompetes were “an important tool in fostering innovation and preserving competition,” adding that there were state laws in place that had long governed their use.
However, the FTC has support from several powerful figures in Washington—including President Joe Biden, who described the proposal as a “huge win.”
Back in 2021, Biden signed an executive order aimed at reducing what he said were anticompetitive practices in the tech and health care sectors, which included a call for noncompete agreements to be banned to stimulate wage growth. At the time, he argued that “true capitalism depends on fair and open competition.”
Vice President Kamala Harris also voiced her support for the ban, describing noncompete clauses as “anti-worker,” while Sen. Elizabeth Warren and Congressman Emanuel Cleaver both took to Twitter to express their support for the FTC’s proposal.
LaDawn Townsend, creator of Recalibrate Leadership and CEO of leadership development firm the VOS Group, told Fortune on Friday that she believed the FTC should use discernment as it moved forward to ensure it did not alienate employees or employers.
“It is imperative that they include a way to protect the trade secrets that employees have at their fingertips,” she said. “The bigger question that should be asked is what are the ways that a dynamic economy can be created that are in the best interest of the employees, that work to make companies successful.”
Townsend suggested the creation of a bipartisan advisory committee made up of CEOs, employee advocates, and select members of the FTC would be “the best course of action.”
“This should not be a rushed process, as the outcome can either boost the economy or be a key contributor to our fiscal decline as a nation,” she warned.
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