The Federal Trade Commission on Tuesday issued a final rule to ban noncompete agreements in employment contracts nationwide, freeing up employees to move jobs but potentially creating roadblocks for companies in the recruiting process.
In the 3-2 vote, commissioners said the change will promote competition and allow workers to start new businesses, innovate or change jobs more easily. The FTC estimates that 30 million people – one in five U.S. workers – are bound by a noncompete clause in their current jobs.
The final rule, which is set to become law 120 days after it is published in the Federal Register, is a somewhat narrower version of the proposed rule that the agency put out for public comment in January of 2023.
But on Wednesday, a legal challenge was issued when the U.S. Chamber of Commerce filed a lawsuit challenging the FTC’s authority to issue such a ban.
The lawsuit, filed in the U.S. District Court for the Eastern District of Texas, argued that the FTC did not have authority to issue rules that define unlawful methods of competition. The Chamber of Commerce was joined by three other business groups: the Business Roundtable, the Texas Association of Business and the Longview Chamber of Commerce.
Daryl Joseffer, chief counsel of the U.S. Chamber’s Litigation Center, characterized the FTC rule banning noncompetes as an “administrative power grab,” according to CNN.
“They’re trying to regulate a century-old business practice across the entire economy,” Joseffer said.
If the rule is allowed to stand, it opens “a pandora’s box, where they can micromanage any aspect of the economy,” said U.S. Chamber Chief Policy Officer Neil Bradley.
In December of last year, New York State Governor Kathleen Hochul vetoed a bill passed by the state legislature to completely ban noncompete agreements in that state.
FTC issues nationwide ban on noncompete agreements, sparks legal battle with business groups
The FTC’s rule would void existing noncompete agreements, besides those applying to executives in “policy-making positions” who make at least $151,164 a year. It would also prevent companies from imposing new noncompetes, even on executives, reports The Hill.
Companies generally use noncompetes to protect trade secrets and to avoid spending money to train employees who can then jump to a competitor. According to The New York Times, the FTC and worker advocates say that noncompete agreements suppress competition for labor, pushing down wages.
The challenge to the rule centers on whether the FTC has the power to make such sweeping decisions. The two commissioners who dissented from the majority said they believed the rule to be “unlawful” and “won’t survive legal challenge.”
The FTC also eliminated a provision in the proposed rule that would have required employers to legally modify existing noncompetes by formally rescinding them. That change will help to streamline compliance, according to the FTC.
Instead, under the final rule, employers will need to provide notice to workers bound to an existing noncompete that the agreement will not be enforced against them in the future. In its ruling, the commission included model language that employers can use to communicate to workers.
The FTC estimates the ban will lead to new business formation growing by 2.7% per year, resulting in more than 8,500 additional new businesses each year.
The final rule is expected to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and it is expected to lower health care costs by up to $194 billion over the next decade.
The FTC also expects the final rule to help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years.
President Joe Biden soon after the announcement said, “The FTC is cracking down on ‘non-compete agreements,’ contracts that employers use to prevent their workers from changing jobs even if that job will pay a few dollars more, or provide better working conditions. Workers ought to have the right to choose who they want to work for.”
Lina M. Khan, FTC chair, argued that the ban ultimately protects workers and their rights.
“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” Khan said. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”
