FTC Bans Non-Compete Clauses, Facing Legal Challenges

The Federal Trade Commission (FTC) voted to prohibit non-compete clauses, which are frequently used by employers to prevent employees from joining competitors. The FTC’s rule, which takes effect in 120 days, is likely to face legal challenges. The FTC first proposed the ban in January 2023 and received 26,000 public comments, with approximately 25,000 expressing support for the measure. FTC Chair Lina Khan declared, “Non-compete clauses suppress wages, stifle innovation, and deprive the American economy of vitality.” The FTC’s ban aims to guarantee that Americans can seek new employment, start businesses, and introduce fresh ideas without hindrance. However, business organizations have vowed to contest the rule in court. The U.S. Chamber of Commerce, a lobbying organization, condemned the decision, stating that unelected commissioners had unilaterally assumed the authority to define legitimate business practices. The FTC estimates that about 18% of U.S. workers, or roughly 30 million people, are covered by non-compete agreements. Initially, they were prevalent among top executives in technology and finance, but their use has since extended to lower-paid employees. A 2021 study revealed that 12% of workers earning $20 per hour or less were subject to non-compete clauses. Supporters of the ban argue that it will boost wages and encourage innovation by allowing workers to switch employers or launch their own ventures. Meanwhile, business leaders contend that it is essential to prevent employees from misappropriating trade secrets or proprietary knowledge. In 2023, the New York State Legislature passed a statewide ban on non-competes, but Governor Kathy Hochul vetoed it. Negotiations over a compromise failed. Oklahoma, North Dakota, and West Virginia have had comprehensive bans on non-competes for decades. Eleven states and Washington, D.C. have implemented laws restricting non-competes for individuals earning below a specific annual salary.