Big news this past week in business/employment law. The FTC is proposing legislation banning noncompete clauses. The agency estimates this could increase workers’ salaries by nearly $300 billion per year.

I’ve never been a fan of noncompete clauses for lower paid workers. But I’ve always believed there is some validity to a business protecting their customer base. There should be a balance between restricting someone’s ability to earn a living v. allowing someone to raid their employer’s customers when they leave employment.

The proposed legislation would generally prohibit employers from using noncompete clauses. Specifically, it would be illegal for an employer:

  • 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 proposed rule would also apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also require employers to rescind existing noncompete clauses and actively inform workers that they are no longer in effect.

The proposed rule would generally not apply to other types of employment restrictions, like non-disclosure agreements. However, other types of employment restrictions could be subject to the rule if they are so broad in scope that they function as noncompete clauses.

The FTC is asking for comments so the proposed legislation could change from the proposal. However, one thing is clear – noncompete clauses are heading to extinction. The trend has been heading in this direction and this proposal could accelerate that trend even faster.

It will also be interesting to see whether this proposal has an impact in franchisor-franchisee situations. It seems franchises will need to be ready to deal with the fact that noncompete clauses could go away. Time will tell.