The U.S. Federal Trade Commission today proposed a new rule that would ban companies from including noncompete clauses in employment contracts.

Noncompete clauses prohibit a company’s employees from seeking or accepting work at rival businesses. In some cases, such clauses also impose additional restrictions on employees.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC Chair Lina Khan. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

The new rule proposed by the FTC would prevent companies from entering into noncompete agreements with workers or attempting to do so. Companies would also be required to void existing noncompete clauses, as well as inform affected employees of the change. 

According to the FTC, the proposed rule “would generally not apply to other types of employment restrictions” such as nondisclosure agreements. However, such agreements could be subject to the rule if they effectively function as a noncompete clause. 

The FTC’s proposal of the rule comes about a year and a half after President Joe Biden signed an executive order focused on increasing competition in the U.S. economy. The order encouraged the FTC to ban or limit noncompete agreements. Additionally, it launched more than 70 other policy initiatives across more than a dozen government agencies.

Before proposing the rule banning noncompete agreements, the FTC carried out an investigation into their impact. The agency reached the preliminary finding that such agreements breach Section 5 of the Federal Trade Commission Act. The section states that “unfair methods of competition in or affecting commerce” are “hereby declared unlawful.”

Last November, the FTC announced a new initiative that focuses on “reactivating Section 5” to address anticompetitive practices better. The agency has already taken a number of regulatory steps as part of the initiative. Earlier this week, the FTC ordered a number of companies to void noncompete agreements that were found to have violated Section 5.

“Research shows that employers’ use of noncompetes to restrict workers’ mobility significantly suppresses workers’ wages — even for those not subject to noncompetes, or subject to noncompetes that are unenforceable under state law,” said Elizabeth Wilkins, director of the FTC’s Office of Policy Planning. “The proposed rule would ensure that employers can’t exploit their outsized bargaining power to limit workers’ opportunities and stifle competition.”

The FTC estimates that its proposed rule would expand career opportunities for about 30 million Americans. Additionally, the agency believes that it could increase wages by nearly $300 billion per year.

Image: FTC