FTC’s Proposed Rule to Ban Noncompetes Faces Stiff Resistance
Workspan Daily
May 31, 2023
Key Takeaways

  • FTC’s proposed rule to ban noncompete. The FTC’s January rule proposal to ban employers from using noncompetes received nearly 27,000 comments, and the agency is expected to vote in April 2024 on the final version of the rule.  
  • Opposition view of the rule. Opponents of the FTC’s proposed rule believe it’s unlawfully broad, violates the Administrative Procedure Act, has limited reach for enforcement and encroaches on established state laws.  
  • Employer benefits of having a noncompete option. Employers commonly use noncompete agreements with senior executives and key employees to protect trade secrets, inventions, competitive strategies, or customer relationships.  
  • Proponents’ view of the rule. Proponents of the rule assert noncompetes are exploitative and want to end the practice. The FTC believes doing so will expand career opportunities and increase wages by almost $300 billion. The FTC also estimates that 1 in 5 employees are under a noncompete at work — that's approximately 30 million people.   

The U.S. Federal Trade Commission’s (FTC) January rule proposal to ban employers from adding noncompetes to their employment contracts is now facing stiff and steady resistance from employer advocacy groups.  

The FTC received nearly 27,000 comments on the draft rule proposed, and Bloomberg Law reported that the agency is expected to vote in April 2024 on the final version of the rule.  

Among the chief concerns from opponents of the proposed rule is that it is unlawfully broad, relies upon research that has significant shortcomings and violates the Administrative Procedure Act.  

“The FTC’s proposed rule is fundamentally flawed,” said James A. Paretti, Jr., a shareholder and member of Littler Mendelson P.C.’s Workplace Policy Institute. “It is at best a solution in search of a problem and would upset centuries of precedent under federal and state law. As zealous advocates of the employer community, we urge the commission to withdraw the rule.” 

The Rule Specifics  

The FTC’s proposed noncompete ban applies to all workers, including independent contractors and interns. As a federal rule, it would supersede state laws which currently have the power to determine how noncompetes work within state lines.  

If approved, the ruling will make it illegal for an employer to:  

  • enter into or attempt to enter into a noncompete with a worker;  
  • maintain a noncompete with a worker; or  
  • represent to a worker, under certain circumstances, that the worker is subject to a noncompete. 

Ben Dryden, an antitrust attorney at Foley and Lardner LLP, echoed Paretti’s sentiments, noting that the FTC does not have the legal authority to adopt a noncompete ban, and even if it did, the agency’s jurisdiction to enforce such a ban is inherently limited.  

“By statute, the FTC would not have jurisdiction to apply a noncompete ban against nonprofits, banks, or airlines,” Dryden explained. “This means that the FTC’s noncompete ban would, at most, be limited in its reach and may result in similarly situated competitors (e.g., for-profit and non-profit healthcare systems) being treated differently for no legitimate reason.”  

Dryden added that the rule would intrude on the laws of the vast majority of states that enforce noncompetes in certain circumstances.  

While there are instances where the use of noncompete agreements are unnecessary, such as those forced on fast food workers who make minimum wage, Dryden said there are many reasons for employers to use “reasonably tailored noncompete agreements.”  

He noted that employers commonly use noncompete agreements with senior executives and key employees to protect trade secrets, inventions, competitive strategies, or customer relationships.  

“There is also empirical evidence showing that noncompete agreements allow employers to make more investments in training and may even result in employees earning higher wages,” Dryden said. “One explanation for this evidence is that noncompete agreements might incentivize employers to make investments that make workers more productive, creating a win-win scenario for workers and the employer.”  

The Counterargument 

The FTC claims the use of noncompetes are exploitative and want to end the practice. It believes doing so will expand career opportunities and increase wages by almost $300 billion. The FTC also estimates that 1 in 5 employees are under a noncompete at work — that's approximately 30 million people.   

Recently, the National Labor Relations Board (NLRB) weighed in on the topic, asserting that noncompete provisions in employment and severance agreements violate the National Labor Relations Act (NLRA) in most cases.  

Jennifer Abruzzo, general counsel for the NLRB, said overly broad noncompetes keep employees from exercising their NLRA Section 7 rights, which protect workers’ right to engage in collective action to improve their working conditions.  

Noncompete provisions reasonably tend to chill employees in the exercise of Section 7 rights, Abruzzo said, when the provisions could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work.  

According to Bloomberg, the FTC had spent about $500,000 and more than 6,000 hours on the rulemaking effort by late February.  

Dryden and other opponents of the rule believe the agency would be best served forgoing further work to adapt the rule and drop it altogether.  

“I am afraid that the FTC is going to waste a lot of its own resources and create a great deal of business uncertainty and distraction, for a ban that ultimately will be invalidated by the courts.,” Dryden said. “Therefore, in my own personal view, I believe the best result would be for the FTC to abandon its proposed rulemaking entirely.”  

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