Potential Impact of the FTC’s Proposed Rule to Ban Noncompetes Nationwide
The Federal Trade Commission (“FTC”) on January 5, 2023, announced a Proposed Rule which would ban noncompetes nationwide. I explained the basic components of the Proposed Rule, discussed its scope, and addressed potential challenges to the FTC’s authority to impose such a wide-reaching rule in a blog post published last week. My colleague Debra S. Katz spoke about the impact of the Proposed Rule with NPR host Sarah McCammon on January 18, 2023.
Given the harm that noncompetes cause by restricting employees’ ability to seek better employment, the FTC’s Proposed Rule is excellent news for employees across the United States. Indeed, the FTC addressed the potential impact of its Proposed Rule across hundreds of pages in its Notice of Proposed Rulemaking (“NPRM”).
The FTC estimates that one in five American workers, approximately 30 million workers, is bound by a noncompete clause. The agency cited to a study that found 38% of workers have worked under a noncompete clause at some point in their lives. Evan P. Starr, James J. Prescott, & Norman D. Bishara, Noncompete Agreements in the U.S. Labor Force, 64 J. L. & Econ. 53, 53 (2021).
Noncompetes restrict workers from moving to a new job, which can be devastating. Workers bound by noncompetes may be prevented from moving to a better-paying job in the same industry, from escaping to a new job to get away from an abusive boss or from illegal workplace harassment, and even from finding employment after being retaliated against for reporting illegal activity. Clearly, large portions of the American workforce are currently subject to noncompetes: the research cited by the FTC demonstrates that high- and low-wage workers alike are subject to these restrictions on workers’ ability to find better employment.
Among particular subgroups of the American workforce, the FTC reported that four occupations have been studied individually: executives, physicians, hair stylists, and electrical and electronics engineers:
- Hair Stylists: A study found 30% of hair stylists worked under a noncompete clause in 2015. Matthew S. Johnson & Michael Lipsitz, Why Are LowWage Workers Signing Noncompete Agreements?, 57 J. Hum. Res. 689, 700 (2022).
- Electrical and Electronics Engineers: One study found that 43% signed a noncompete clause. Matt Marx, The Firm Strikes Back: NonCompete Agreements and the Mobility of Technical Professionals, 76 Am. Socio. Rev. 695, 702 (2011).
- Physicians: A study found 45% of physicians worked under a noncompete clause in 2007. Kurt Lavetti, Carol Simon, & William D. White, The Impacts of Restricting Mobility of Skilled Service Workers Evidence from Physicians, 55 J. Hum. Res. 1025, 1042 (2020).
- Executives: One study found the proportion of executives working under a noncompete clause rose from 57% in the early 1990s to 67% in the mid2010s. Liyan Shi, Optimal Regulation of Noncompete Contracts 27 (2022), https://static1.squarespace.com/static/59e19b282278e7ca5b9ff84f/t/626658ffb73adb2959bd4371/1650874624095/noncompete_shi.pdf. Another found that 62% of CEOs worked under a noncompete between 1992 and 2014. Omesh Kini, Ryan Williams, & Sirui Yin, CEO Noncompete Agreements, Job Risk, and Compensation, 34 Rev. Fin. Stud. 4701, 4707 (2021).
- Low wage workers such as fastfood workers have also been forced to sign noncompetes: the Huffington Post covered a story in 2014 about Jimmy John’s workers made to sign noncompetes.
While the FTC studied these occupations, noncompetes are pervasive throughout the workforce. Indeed, 53% of workers covered by noncompete clauses are hourly workers. Michael Lipsitz & Evan Starr, Low-Wage Workers and the Enforceability of Noncompete Agreements, 68 Mgmt. Sci. 143, 144 (2021) (analyzing data from the Starr, Prescott, & Bishara survey).
Some states, including Virginia, Maryland, and D.C., have recently banned noncompetes for workers making below a certain annual salary threshold. For example, D.C. has banned noncompetes for workers making less than $150,000. This effectively protects lower-wage workers from noncompetes and opens up opportunities for them to move from one job to the next more easily. However, the majority of states permit noncompetes with few, if any, restrictions.
Notice and Comment Period
The above discussion addresses the “potential impact” of the Proposed Rule because the Proposed Rule is still just that: proposed. The FTC’s Proposed Rule is not yet enforceable. The agency must provide for a 60-day “Notice and Comment” period during which interested parties and the general public may respond to all parts of the Proposed Rule’s solicitation of public comments. That 60-day period is open until March 10, 2023.
Comments may be submitted on the Regulations.gov publicly accessible website at https://www.regulations.gov. In the Fact Sheet the FTC published along with the Proposed Rule, the agency specifically requested public comment on a number of topics, including “whether senior executives should be covered by the rule, or subject to a rebuttable presumption rather than a ban” and “whether low- and high-wage workers should be treated differently under the rule.” The Chamber of Commerce has come out strongly opposing the Proposed Rule and undoubtedly its members will come out in droves to do the same. Workers can and must do the same – in support of the FTC’s Proposed Rule.
After the Notice and Comment period closes, the FTC will review all comments and perhaps incorporate them into potential changes to the rule before releasing a Final Rule. The NPRM contemplates that the Final Rule would go into effect 180 days after publication of the Final Rule.
Therefore, if the FTC’s Proposed Rule ultimately becomes final and enforceable, millions of American workers would be free to compete on the job market in ways they were previously restricted. This is excellent news for employees across the country.