Attorneys Advocating For Illinois Healthcare Practitioners And Providers

FTC proposes new rule that would ban noncompete clauses

On Behalf of | Feb 7, 2023 | Healthcare Law

The Federal Trade Commission (FTC) released a Notice of Proposed Rulemaking (NPRM) on January 5, 2023 that would prohibit the use of noncompete clauses. Noncompete clauses currently affect an estimated 18% of U.S. workers, totaling about 30 million people. Noncompete clauses, also known as restrictive covenants, limit workers from working for a competitor or starting a competitive business following the termination of their employment.

Existing limitations on noncompetes

Three states already prohibit the use of noncompete clauses, including California, North Dakota and Oklahoma. The NPRM calls out records in these states that prove that even without the use of noncompete clauses, industries reliant on trade secrets and other proprietary information have still been successful. This shows that employers can make use of other ways to protect their confidential information.

Beyond outright banning noncompetes, other states have also imposed limitations to these clauses. For example, Illinois passed amendments to the state’s Freedom to Work Act that took effect on January 1, 2022. The Act now prohibits restrictive covenants for employees earning less than $75,000 per year. The employee must also be informed of the noncompete before signing.

The proposed benefits of prohibiting noncompetes

The FTC’s proposal goes beyond the existing Illinois law. Noncompetes would be prohibited regardless of wages and would apply to all working for an employer, including employees, independent contractors and volunteers. The FTC lists several key benefits for prohibiting noncompetes, including:

  • Increased workers’ wages. The FTC states that noncompetes significantly reduce workers’ earnings. By allowing workers to progress more freely in their careers, wages across industries could increase by $250 billion to $296 billion per year.
  • Closing racial and gender wage gaps. Researchers also found that the use of noncompete clauses further exacerbates racial and gender wage gaps. Banning noncompetes could close these gaps by 3.6 to 9.1%.
  • Increased ideas and innovation. The FTC states that without roadblocks for entrepreneurs to form new businesses or bring innovative ideas to new companies, businesses across industries can thrive.
  • The potential to save consumers money. Similarly, the FTC notes that in markets with fewer newcomers and more saturation, like health care, consumers often face rising costs. The proposed rule would save consumers an estimated $148 billion annually in health care costs.

What’s next?

This is just the first step in a long road ahead for this proposed rule. The FTC has invited the public to submit their comments on the proposed rule and will accept comments through March 10, 2023. Comments are encouraged in several areas, including whether to exempt senior executives and whether workers earning lower wages versus higher wages should be subjected to the same rules. Legal challenges are likely to follow if the rule becomes final.