Employees could no longer require employees to sign noncompete agreements under a rule proposed by the Federal Trade Commission (FTC).

The proposal, which is being regarded as a historic regulatory move, comes over a year after President Joe Biden issued an executive order that encouraged the FTC to limit or ban noncompetes in employment.

The proposed rule states that noncompetes suppress labor mobility, negatively impact competition, and reduce wages — including for categories of workers who are not required to sign a noncompete agreement.

Under the rule, employers would have to retract all existing noncompete clauses and provide notices to employees to indicate that they no longer apply. A “limited exception” for noncompete clauses between the seller and buyer of a business is included in the proposal.

The rule would not apply to nondisclosure agreements or nonsolicitation agreements with clients or customers.

A public comment period will be open for 60 days after the proposal is published in the Federal Register.

If the rule becomes final, it will go into effect 180 days after publication.

Increased earnings for employees

The FTC estimated that banning noncompetes might increase employee earnings across the country in the range of $250 billion to $296 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 FTC Chair Lina Khan, in a statement. “By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

Under the proposal, non-compete agreements are defined as “contractual terms between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”

The FTC would employ a “functional test” to decide whether a clause or contract falls under the rule’s definition of “noncompete.”

The agency noted that broad nondisclosure agreements could essentially amount to de facto noncompetes, in which case they, too, would be barred.

The proposed rule doesn’t include any exception for senior executives, highly skilled workers or high-income employees. However, the FTC does request public comment as to whether the rule should be applied differently to different categories of workers.

The proposal’s limited exception for noncompete clauses between the seller and buyer of a business would only apply to individuals who have a 25% or greater ownership interest in the business being sold. Any noncompete signed in connection with such a sale would remain subject to other federal antitrust and state laws that already bar overly expansive noncompetes.

The proposed rule preempts any inconsistent state laws or regulations unless the state measure gives employees’ greater protection.