Noncompete Ban Amplifies Biden Push to Loosen Worker Contracts

The US Federal Trade Commission’s move to ban virtually all noncompete clauses is the biggest step yet in a broader regulatory crackdown forcing employers to re-evaluate how they recruit and retain workers.

The National Labor Relations Board has been tightening restrictions around non-disparagement and confidentiality clauses in severance agreements, and the Federal Deposit Insurance Corp. has sought to ban noncompete clauses in worker contracts affected by bank deals. Beyond noncompetes, the Justice Department has joined the FTC in focusing on labor impacts in its antitrust enforcement efforts.

The FTC’s rule, announced Tuesday, won’t take effect for at least 120 days from being published, and faces legal challenges. But it and other recent measures have left companies weighing how to navigate employee contracts, and whether to continue using noncompetes.

If the FTC’s rule survives legal challenges, it would represent a “fundamental change to the workplace,” said Mark Goldstein, a labor and employment partner at Reed Smith. “It will be the number one seismic shift in restrictive covenant law probably ever, and a huge shift in how employers operate, recruit, and their approach to talent.”

Banning noncompetes would impact about 30 million Americans and increase worker earnings by over $400 billion over 10 years, the FTC has estimated.

Nearly two-thirds of employers that currently use noncompete agreements say they are either moderately or slightly less likely to use them due to recent legislative and regulatory activity, according to a recent survey by law firm Littler Mendelson.

Amid the heightened scrutiny, employers are relying more heavily on non-solicitation and confidentiality agreements, as well as trade secret protection programs, said Melissa McDonagh, co-chair of Littler’s trade secrets practice group.

But depending on how they’re phrased, such pacts also could fall under the FTC’s definition of a noncompete agreement. Under the final rule, any agreement that “functions to prevent” workers from seeking other employment could be classified as an unlawful noncompete.

“A lot of our clients have been watching this regulation play out, and taking a wait and see approach,” McDonagh said, as employers weigh whether noncompetes are necessary at all.

The FTC’s sweeping ban covers noncompetes against workers in nearly all industries and across income levels. While a handful of states have already moved to outlaw noncompetes, the FTC’s rule would supersede any state law that conflicts with the nationwide ban, setting a floor for restrictions.

“There’s going to be some reading the tea leaves and the stars so companies can figure out how they can avoid getting caught up in this,” said Michael Elkins, an employment attorney and founder of MLE Law.

Read More: Biden Scrutiny of Labor Competition Extends to Bank Noncompetes

Broad Approach

Besides severance agreements, the NLRB has been restricting non-disparagement and confidentiality clauses in handbook policies that could prevent workers from organizing.

NLRB General Counsel Jennifer Abruzzo earlier this year asked the board to find that noncompetes also violate federal labor law, after releasing a memo on the topic in May 2023.

The two agencies signed a memorandum of understanding in 2022, citing “the imposition of one-sided and restrictive contract provisions, such as non-compete and nondisclosure provisions,” as one issue of common regulatory interest.

“You’ve got some members of Congress and administration saying, if you can’t do it through Congress, we’ll try another approach,” said Russell Beck, a trade secrets lawyer at Beck Reed Riden LLP. “Here’s the other approach.”

MLE Law’s Elkins said the labor board under the Biden administration has been very effective in altering employers’ attitudes towards worker contracts.

“The NLRB has been on a rampage these past two years,” he said. “But companies are listening. They don’t want to be caught up in unfair labor practice litigation.”

The FTC received more than 26,000 comments on the draft rule it released last year, with opponents including industry groups arguing the ban goes too far in restricting businesses. At least two lawsuits challenging the ban have been filed so far, including from a Texas tax services company and the US Chamber of Commerce.

See also: Noncompete Ban’s First Legal Challenge Filed by Texas Tax Firm

Despite the FTC’s coming legal battle, labor and employment lawyers say the Biden administration’s focus on labor constraints under competition law means companies must rethink contract provisions.

The FTC and the Justice Department have shown “very strong views against restrictions on labor,” beyond the FTC’s noncompete ban, said Neely Agin, head of US antitrust at Norton Rose Fulbright.

“We’re seeing this as just one small piece of a very broad, very aggressive enforcement effort,” Agin said.