After the Federal Trade Commission (FTC) proposed a new rule in 2023 banning non-compete clauses, the commission is expected to vote on the matter in April 2024. Employment lawyers expect the rule to become law but to face steep legal challenges in the aftermath of its passage.
A non-compete clause is a contractual term that restricts one’s right to work in a similar profession after an employment relationship terminates. The FTC’s initial recommendation came after it found that non-compete clauses violate federal law by promoting unfair competition. Specifically, the commission states that such clauses suppress wages and restrict innovation by depriving workers of their freedom to work. Critics argue that the FTC overstepped its rule-making authority, and outlawing non-competes would strip employers of trade secret protection.
Under the FTC’s proposed rule, it would be illegal for an employer to enter or attempt to enter into a non-compete with a worker, preserve a non-compete with a worker, or express to a worker that they are subject to a non-compete. While the FTC has the authority to issue a final rule that’s inconsistent with the proposed one, employment lawyers are recommending that employers prepare for a mirror image of the final and proposed versions. The rule would apply to a variety of workers, including paid and unpaid employees and independent contractors.
Non-competes are already banned in California, Oklahoma, North Dakota, and Minnesota. Nearly a dozen other states have implemented non-compete bans for certain professions or for employees earning above a certain threshold. More than half the states have no prohibition on non-competes. We will provide updates on this important issue as they develop.