Federal Trade Commission Could Ban Noncompete Agreements. Here's What it Means for U.S. Workers

What happened

Today, the Federal Trade Commission (FTC) proposed a rule to ban employers from imposing noncompete agreements on their workers. The proposed rule would make it illegal for an employer to:

• Enter into or attempt to enter into a noncompete agreement with a worker
• Maintain a noncompete agreement with a worker
• Represent to a worker, under certain circumstances, that the worker is subject to a noncompete agreement.

This would apply to anyone who works for an employer, paid or unpaid, including independent contractors, interns, and volunteers. Employers would also be required to rescind existing noncompetes and inform workers that noncompete clauses are no longer in effect.

The public can submit comments on the proposal for 60 days, and the FTC will then finalize the rule. It would take effect 180 days after the FTC publishes the final version of the rule in the Federal Register. However, it could face legal challenges.

So what

The FTC reports that about one in five American workers (approximately 30 million people) are bound by noncompete clauses and that this proposed rule could increase wages by nearly $300 billion per year. "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," said Lina M. Khan, FTC Chair, in the press release announcing the proposal.

Noncompete clauses prevent an employee from working for a competing employer or starting a competing business. They usually apply within a certain geographic area and period of time after the employment term ends. These contractual terms can negatively impact worker pay, since switching jobs is one of the ways people increase their income.

Although noncompetes are more common for high-salary workers, they're not exclusive to high earners. Some businesses add these contractual terms with interns and low-salary workers, and they've been used with many types of employees across various industries.

Even if you're not bound by a noncompete, they can hold down wages for other workers, as well. The hiring process is more expensive for employers that need to navigate noncompete agreements, as they spend more time determining which candidates they can hire. Studies have shown that average wages are generally higher in states that restrict noncompetes. Many workers could benefit from a personal finance perspective if noncompete clauses are eliminated.

Now what

The FTC's proposal is excellent news for workers across the country, and especially those currently bound by noncompetes. If the rule goes through as planned, you'll have the freedom to look for higher-paying job opportunities or start your own business, without the worry of legal troubles.

The rule would take some time to go into effect. For now, you can review the proposal to determine how it may affect your work situation and submit a comment if there are any changes you'd like to see. Comments can be filed online when the proposal is published at Regulations.gov.