FTC’s Noncompete Ban Mirrors State Proposals Before Scaling Back

The Federal Trade Commission’s proposal to ban nearly all worker noncompetes follows years of legislation in statehouses, where lawmakers have a track record of walking back sweeping proposals to enact less-stringent noncompete limits that could prove a model for the agency’s final rule.

Policymakers such as those in the Massachusetts legislature and the D.C. Council have considered near-total bans on employee noncompete contracts. Those contracts, which researchers estimate cover roughly one-fifth of US workers, stipulate that employees won’t leave their job to go work for a competing business.

Like the FTC, state lawmakers have cited the negative effects the contracts have on workers’ mobility. The FTC, in announcing its proposed rule on Jan. 5, said banning noncompetes could yield a $300 billion boost to annual wages across the workforce. That increase would purportedly result from workers’ improved ability to change jobs, leverage to negotiate with their employer, and freedom to start their own businesses.

But D.C. and Massachusetts lawmakers, like those in other states, decided against an outright ban on noncompetes—opting instead to limit their use for lower-income or hourly workers and set other parameters to discourage abuse. Business groups complained that banning the contracts would make it difficult for companies to protect their trade secrets from being carried off to a competing business.

The FTC proposal “is a first cut, and it’s a big one. I’m not trying to downplay it,” said Katie M. Connolly, an employment lawyer with Nilan Johnson Lewis PA in Minneapolis. “But if you look at the whole body of legislators and rulemakers, that is what tends to happen. There’s an initial proposal that’s an outright ban, and then it gets whittled down.”

The D.C. noncompete law, for example, which took effect Oct. 1, bans businesses from asking employees who earn less than $150,000 per year to sign noncompete agreements. That was the revised version council members passed in 2022, after hearing business backlash to the near-total ban on noncompetes they initially passed in 2020. The council delayed the 2020 ban from taking effect while considering revisions.

Income Thresholds

Eleven states, most recently Colorado, have enacted similar legislation, banning the use of noncompetes below a certain income threshold or for hourly workers. Those thresholds range from about $30,000 of annual income in New Hampshire to $100,000 or more in Oregon, Washington state, and Colorado.

A handful of other states ban noncompetes outright, most notably California where state law has made the contracts generally unenforceable for more than a century.

While similar to California’s law, the FTC proposal potentially goes beyond it. The federal rule would ban noncompetes and also “de facto” noncompetes, which the commission said could include other types of contracts such as nondisclosure agreements if they are applied so broadly as to function like a noncompete.

The FTC proposal would ban new noncompetes going forward and require that existing noncompete contracts be rescinded, whereas most state laws have allowed existing contracts signed prior to a law’s effective date to remain in place.

If it survives the widely expected legal challenges and takes effect, the FTC regulation would override state noncompete laws.

Weighing Alternatives

The FTC’s invitation for public comments provided another hint that the commission might be likely to scale back its proposal before issuing a final rule, according to several employment lawyers.

Specifically, the commission invited comments on possible alternatives to the ban such as a requirement that employers give job candidates advance notice that they’ll be asked to sign a noncompete. The rulemaking notice also raised the possibility of treating noncompetes for senior executives differently than other workers.

“The fact that they specifically request comments on alternatives—that’s an interesting approach for an agency to take,” said Christopher P. Stief of Fisher Phillips in Philadelphia.

“That suggests they’re open” to scaling back the rule before making it final, he said. “It’s happened in a lot of the state capitals.”

The latest wave of state legislation around noncompetes was partly inspired by a “call to action” from the Obama administration in 2016, which identified forms of abuse such as locking low-wage workers into their jobs.

“I expect that the FTC will pare back the proposed rule to make it address the abuses,” which include “using them for low-wage workers, using overly-broad noncompetes, and disclosing the requirement of a noncompete the day the employee shows up for work,” said Russell Beck, an employment lawyer with Beck Reed Riden LLP in Boston.

The FTC rule is widely expected to face legal challenges, as many lawyers and business interests such as the US Chamber of Commerce question whether Congress delegated such broad rulemaking authority to the commission.

“Even though the FTC likely doesn’t have authority to issue any rule on employee noncompetes outside of mergers, I think if they create a narrow rule, it will be far less likely to be challenged,” Beck said.

The Case for a Full Ban

Despite a track record of state lawmakers scaling back their proposals, the FTC’s work in laying out its case for a noncompete ban suggests the Democratic commissioners in charge might not be eager to soften the regulation, said John W. Lettieri, CEO and cofounder of the Economic Innovation Group.

The FTC’s estimate of a $300 billion wage boost couldn’t come from protecting only low-wage workers, for example, Lettieri said.

“It’s those higher-skill, higher-wage knowledge workers who have a high propensity for entrepreneurship,” he said. “The FTC set a really high bar. My hope would be the final rule does not stray too far from the scope of the proposed rule.”

But companies can make a case of their own against an outright ban.

They can use other tools to try to protect their trade secrets, such as confidentiality clauses in employment contracts, according to Connolly, but she said without the preventative effect of a noncompete, it’s often difficult to know a former employee has taken company secrets to a competing business until it’s too late.

“Once the cat’s out of the bag, the cat’s out of the bag,” Connolly said.