Washington – A federal agency has approved a rule that would prohibit U.S. businesses from preventing employees from taking positions with rivals. Noncompete agreements, which stop workers from switching to or starting competing businesses for a predetermined amount of time, will be outlawed under the rule approved by the Federal Trade Commission (FTC) on Tuesday by a 3-2 vote. According to the FTC, 30 million people – about one in five workers – are currently subject to such limitations. Noncompete measures, which were once mostly associated with high-level executives in the tech and financial sectors, have recently spread to lower-paid workers such as security guards and sandwich-shop employees. A study conducted by the Federal Reserve Bank of Minneapolis in 2021 found that more than one in ten workers earning $20 or less per hour are subject to noncompete agreements. FTC officials argued that noncompete agreements harm workers by making it harder for them to switch jobs for better pay, which is often where workers see the greatest salary increases. The agency contends that by reducing overall churn in the job market, these measures also have a negative impact on employees who are not covered by them because fewer jobs become available as fewer people leave their positions. According to the FTC, they can also have a negative impact on the economy by making it more difficult for other businesses to recruit essential workers. The organization received almost 26,000 comments on the plan, the majority of which were positive. The rule, which does not apply to nonprofit workers, is scheduled to go into effect in six months unless legal challenges prevent it. Lina Khan, the FTC chair, stated before the vote, “We heard from employees who were trapped in abusive workplaces because of noncompetes.” She said that some doctors had been prohibited from practicing medicine after leaving their practices. Business organizations have criticized the action, claiming that it casts too wide a net by banning almost all noncompetes. They also claim that the FTC lacks the authority to do so. Melissa Holyoak and Andrew Ferguson, two Republican appointees to the FTC, voted against the idea. They claimed that the agency was abusing its authority by approving such a wide-ranging rule. The U.S. Chamber of Commerce has stated that it will sue to halt the move, which could prevent the rule from being implemented for months or even years. Additionally, if former President Donald Trump prevails in the 2024 presidential election, his administration may rescind the regulation. The FTC is outlawing non-competes under the premise that they represent an “unfair method of competition,” but the Chamber argues that the law does not permit the agency to regulate on those grounds. Neil Bradley, executive vice president at the Chamber, said, “If they were to start exerting that authority, you’re actually opening a Pandora’s box.” “There are essentially no constraints on what individuals could eventually decide constitutes an unfair method of competition.” Three states, including California, have already outlawed noncompete agreements. Some opponents of noncompete agreements claim that California’s prohibition has been a major factor in the state’s innovative tech economy. John Lettieri, CEO of the Economic Innovation Group, a tech-backed think tank, maintains that early innovators’ ability to leave one company and start a competitor was critical to the semiconductor industry’s development. “So many important foundational businesses would not have been born, or at least not in the same way, on the same timeline, and certainly not in the same location, if entrepreneurs had not been able to spin out, start their own businesses, or move to a better company,” Lettieri said.
Federal Trade Commission Bans Noncompete Agreements
