The spread of noncompete agreements “beyond the boardroom,” helped spark the Federal Trade Commission’s proposal to ban such contracts, FTC Chair Lina Khan said in recent public remarks.

She described how noncompete agreements have traditionally been more common among highly paid executives, but in recent years a growing number of employers have been asking lower-wage employees to sign such contracts as well. 

For example, fast-food workers, journalists and security guards are among the types of employees who are required to sign noncompetes in some jurisdictions, Khan said during the 2023 Berkeley Spring Forum on M&A and the Boardroom.

“The set of professions where these non-competes have proliferated are really across the board, across income-level,” Khan said. “And so we thought this was something that required a closer look.”

The FTC’s pending proposal, which was put forward in January, would ban employers from entering noncompete clauses with their workers, including independent contractors.

The rule would also require employers to rescind existing noncompete clauses with workers and inform their employees that the contracts are no longer in effect. 

Experiment in states

During her remarks delivered remotely to the UC Berkeley event on April 26, Khan also spotlighted that many states have introduced noncompete bans or restrictions through the years, while others have less loosely regulated the agreements.

This has allowed researchers to compare the impact of noncompetes on workers across the country. 

Researchers have concluded that noncompetes depress workers’ wages, Khan said, and the FTC estimates a national ban on the agreements “could boost worker wages to the tune of $300 billion a year.”

She also said that even in states where noncompetes are not enforceable, some employers still include them in contracts. 

“There can actually still be a chilling effect on workers who might not actually know that they're not enforceable,” Khan said at the event presented by UC Berkeley’s Center for Law and Business and Freshfields. 

California example

As for critics who suggest banning noncompetes may limit innovation, Khan pointed to the state of California.

The state has long prohibited noncompetes, but has been known for being home to many innovative companies, particularly in the tech industry.

Meanwhile, companies in the Golden State have found other ways to achieve some of the key goals employers often have when they make employees sign noncompetes, Khan said.

“California remains a great example of how there could be more tailored solutions like non-disclosure agreements or trade secrets that are more appropriate to address for some of the concerns that people have,” she said.

California was one of 18 states whose attorneys general recently came out in support of the FTC’s proposed noncompete ban.

Promoting innovation

From a broader competition perspective, Khan said noncompetes can hinder new business formation.

This impeding ultimately reduces innovation rather than promotes it, she argued. 

“Oftentimes, it's the very workers at existing firms that can be best positioned to go start their own company or spin off a particular venture,” Khan said. “And when that activity is being restrained through the existence of noncompetes, again, you can have an aggregate effect.”

Enforcement actions and next steps

Even without a ban in place, the FTC chair highlighted how the agency has taken enforcement actions in recent months regarding employers’ use of noncompetes.

For example, two Michigan companies that were enforcing noncompetes with low-wage security guards agreed as part of FTC consent orders to end their use of such agreements.

As for next steps regarding the proposed noncompete ban, Khan said the FTC is reviewing the thousands of comments about the issue the agency has received.