FTC’s Non-Compete Clause Ban Rule Set for April

A Federal Trade Commission (FTC) rule that would ban non-compete clauses is scheduled to be finalized in April and go into effect soon after. The regulation would be a welcome relief for skilled job-seekers attempting to join a competitor in their fields, and a major loss for companies afraid of losing market share and customers to departing employees.

Assuming the rule is finalized and litigation challenging the constitutionality of the reg fails, businesses can blame punitive companies for the change. For far too long, companies took advantage of their legal ability to keep valued employees in-house. Lawsuits in state and federal courts over the decades showed how companies:

• restricted workers’ ability to work for a competitor for up to two years rather than the standard one-year lock
• imposed non-competes on mid- to low-income workers
• designated multiple firms in a city or region as competitors, effectively shutting out would-be job jumpers from jobs in their field of expertise and location, and
• sued former employees who made lateral moves for breach of contract and damages.

Three states currently ban non-competes — California, North Dakota and Oklahoma. The FTC rule mirrors California’s.

A leading opponent of the FTC’s non-compete ban, the Society for Human Resource Management, argues the rule will “impede [companies’] ability to balance the needs of workers and employers and will reduce the contractual capabilities of reasonable and consenting parties. … Without the use of reasonable, narrowly tailored noncompete agreements, employers will be precluded from recouping their investments in employees, as well as intellectual capital.”

More than 27,000 employers and employees commented on the reg when it was proposed in spring 2023, reportedly a record for FTC rulemaking. Opponents could face an uphill battle arguing the reg is unconstitutional. Judges will look to contract law on the books to determine if the rule is a fair protection for workers and doesn’t place an onus on businesses. There’s no guarantee the case would reach the U.S. Supreme Court depending on how lower courts rule.

About 20% of U.S. workers are bound by non-compete clauses, according to the FTC. Employees lose out on making higher wages as a result.