The FTC moves to ban non-compete clauses

The Federal Trade Commission has proposed banning a staple of modern employment contracts: the non-compete clause, the legal provisions that prevent workers from leaving a company for a rival in the same industry — or from launching a competing startup.

The FTC estimates 1 in 5 Americans work under non-compete clauses that cost them up to $300 billion in lost wages.

“It can be a real problem for folks who are looking to find a job with a better wage, with better health care benefits, more flexibility for their families,” says Elizabeth Wilkins, who directs the FTC’s Office of Policy Planning.

The proposed rule would nullify all existing non-compete clauses and ban them for future employees and independent contractors.

Wilkens says that would also benefit consumers because “non-competes hamper innovation by restricting the flow of knowledge across competitors.”

Noncompetes are most common in high-skilled fields like engineering, but law professor Orly Lobel at the University of San Diego says they’ve also become increasingly prevalent in lower-wage work like “camp counselors, yoga instructors, warehouse employees.”

Many employers argue that noncompete clauses are the most effective way of keeping sensitive information in-house.

Other legal protections for safeguarding trade secrets are just difficult to enforce, says Carolyn Luedtke at the law firm Munger Tolles and Olson.

“You’re gonna have to show that someone stole something, and that’s obviously much harder to prove than just proving someone went to a competitor,” she said.

Should the FTC’s proposal become a rule, experts say legal challenges are likely.