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What’s a Noncompete Clause and Why Does the FTC Want to Ban Them?

Contractual clauses barring workers from competing with their former employers have existed for centuries, with the first known legal challenge to one going back to 1414 London. The provisions have become increasingly common in the US, with an estimated 20% of workers — roughly 30 million Americans — subject to them today. Employers argue that noncompetes help protect their investments in employees. Critics say they harm workers. The US Federal Trade Commission has proposed prohibiting them altogether.

1. What is a noncompete clause?

It’s a provision that prohibits employees, during or after their employment, from working for an employer’s competitors or from setting up a competitive enterprise themselves. Typically, the prohibition is confined to a period of time after employment ends. It also may be limited to a geographic area. 

2. Who do noncompetes apply to?

Noncompetes are most common in the technology, finance and health-care industries, but they have been used with all kinds of workers, including hairdressers, security guards and fast food employees. Several states, including California and Oklahoma, bar noncompetes. Others, including Washington, Oregon and Illinois, ban them for low-wage or hourly workers.

3. What do advocates of noncompetes say?

Those in favor of noncompetes argue that they protect a company’s investments in worker training, in terms of both time and money, and that they help ensure that employees can’t take confidential information or trade secrets on to a business rival. The Chamber of Commerce and other business groups oppose the FTC’s proposal to prohibit the clauses, saying that would be beyond the scope of the agency’s authority. The Chamber of Commerce, the nation’s biggest business lobby, has threatened to sue if the agency moves forward with a ban. The organization’s president, Suzanne Clark, in an essay published by the Wall Street Journal, decried the FTC’s efforts to act on noncompete clauses without congressional authorization. She said such a move would mean the agency could regulate or ban any employment arrangement “arbitrarily.”

4. Why does the FTC want to ban noncompetes?

The FTC under chair Lina Khan argues that noncompetes reduce worker mobility, leading to reduced wages for all workers, not just those with noncompetes in their contracts. It calculates that a ban could add almost $300 billion a year to nationwide wages. The agency argues that clauses also can cut down on the creation of new jobs because startups and other new firms can’t hire workers subject to noncompetes. Advocates of a ban say that employers can safeguard confidential information through the use of non-disclosure agreements or trade secret laws, two avenues that wouldn’t have as significant an economic burden as noncompetes. The FTC’s proposed rule would require companies to nullify existing noncompete clauses for employees within six months. It would allow noncompetes to prevent a company owner or partner who has sold out of a business from immediately re-entering the field.

5. What happens next?

The FTC will accept public comments on its proposal through March 20. It will review them before deciding whether to move forward with a final version. The last time the FTC issued a rule defining an unfair method of competition was in 1968, known as the Men and Boy’s Tailored Clothing Rule.

• FTC Chair Lina Khan argues for the ban in an oped in the New York Times.

• The FTC’s factsheet on its proposed ban.

• Law Professor Alan Meese argues against banning noncompetes in the Wake Forest Law Review.

• A report by the US Treasury Department contains an appendix on the legal history of noncompete clauses.

(An earlier version of this story corrected the type of rule the FTC last issued in 1968 in section 5.)

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