The Federal Trade Commission today proposed a rule that would prohibit employers from imposing noncompete clauses on workers, arguing that "noncompetes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act."

The contract clauses currently "bind about one in five American workers, approximately 30 million people," the FTC said in a fact sheet, writing that noncompetes prevent workers from seeking better jobs and prevent employers "from hiring qualified workers bound by these contracts."

"Noncompetes undermine core economic liberties," FTC Chair Lina Khan wrote. "Evidence suggests noncompetes also suppress earnings and opportunity even for workers who are not subject to a noncompete. FTC economists estimate that noncompetes lower US workers' collective income by $250-$296 billion [per year]."

Khan added that "locking workers in place can enable incumbents to close off markets to new rivals, undermining dynamism and healthy competition."

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Employers would have to rescind existing noncompetes

The FTC said its proposed rule "would make it illegal for an employer to enter into or attempt to enter into a noncompete with a worker; maintain a noncompete with a worker; or represent to a worker, under certain circumstances, that the worker is subject to a noncompete."

The FTC said employers would have to "rescind existing noncompetes and actively inform workers that they are no longer in effect." The proposed rule would apply to employees and independent contractors, covering "anyone who works for an employer, whether paid or unpaid," the FTC said.

The FTC defined a noncompete clause as "a contractual term 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."

A noncompete ban would affect many types of jobs and industries. "Companies use noncompetes for workers across industries and job levels, from hairstylists and warehouse workers to doctors and business executives," the FTC said. "In many cases, employers use their outsized bargaining power to coerce workers into signing these contracts."

The FTC pointed to a case involving Amazon, which sued former executive Gene Ferrell in 2017, alleging he violated a noncompete agreement when he left to join a tech startup called Smartsheet. "After unfavorable media coverage, Amazon dropped the suit," the FTC said. "Under the leadership of Gene and others, Smartsheet thrived and exceeded $500 million in annual revenue."