New FTC Rule Bans ‘Noncompete’ Agreements for Most Employees
(WASHINGTON, D.C.) — U.S. companies would no longer be able to bar employees from taking jobs with competitors under a rule approved by a federal agency Tuesday, though the rule is sure to be challenged in court.
The Federal Trade Commission voted Tuesday 3-2 to ban measures known as noncompete agreements, which bar workers from jumping to or starting competing companies for a prescribed period of time. According to the FTC, 30 million people — roughly one in five workers — are now subject to such restrictions.
[time-brightcove not-tgx=”true”]The Biden administration has taken aim at noncompete measures, which are commonly associated with high-level executives at technology and financial companies but in recent years have also ensnared lower-paid workers, such as security guards and sandwich-shop employees. A 2021 study by the Federal Reserve Bank of Minneapolis found that more than one in 10 workers who earn $20 or less an hour are covered by noncompete agreements.
When it proposed the ban in January 2023, FTC officials asserted that noncompete agreements harm workers by reducing their ability to switch jobs for higher pay, a step that often provides most workers with their biggest pay increases. By reducing overall churn in the job market, the agency argued, the measures also disadvantage workers who aren’t covered by them because fewer jobs become available as fewer people leave jobs. They can also hurt the economy overall by limiting the ability of other businesses to hire needed employees, the FTC said.
The agency received about 26,000 comments on the proposal, most of them in favor. The rule, which doesn’t apply to workers at non-profits, is to take effect in six months unless it is blocked by legal challenges.
“We heard from employees who, because of noncompetes, were stuck in abusive workplaces,” said Lina Khan, chair of the FTC, said before the vote. Doctors have been prevented from practicing medicine after leaving practices, she added.
Business groups have criticized the measure as casting too wide a net by blocking nearly all noncompetes. They also argue that the FTC lacks the authority to take such a step. Two Republican appointees to the FTC, Melissa Holyoak and Andrew Ferguson, voted against the proposal. They asserted that the agency was exceeding its authority by approving such a sweeping rule.
The U.S. Chamber of Commerce has said it will sue to block the measure, a process that could prevent the rule from taking effect for months or years. And if former President Donald Trump wins the 2024 presidential election, his administration could withdraw the rule.
The FTC is banning noncompetes on the grounds that they constitute an “unfair method of competition,” but the Chamber says the law doesn’t authorize the agency to regulate on those grounds.
“If they were to start exercising that authority, you’re really opening a Pandora’s box,” said Neil Bradley, executive vice president at the Chamber. “There’s literally no limitations on what people one day can decide is an unfair method of competition.”
Noncompete agreements are banned in three states, including California, and some opponents of noncompetes argue that California’s ban has been a key contributor to that state’s innovative tech economy.
John Lettieri, CEO of the Economic Innovation Group, a tech-backed think tank, argues that the ability of early innovators to leave one company and start a competitor was key to the development of the semiconductor industry.
“The birth of so many important foundational companies could not have happened, at least not in the same way or on the same timeline and definitely not in the same place, had it not been for the ability of entrepreneurs to spin out, start their own companies, or go to a better company,” Lettieri said.