FTC prohibits non-compete agreements for employees

The Federal Trade Commission on Tuesday banned non-compete agreements for most U.S. workers with a new rule that will prevent employers from enforcing clauses that prevent workers from switching employers within their industries, which the agency says is suppressing wages and inflating labor markets.

The FTC voted 3-2 on Tuesday to issue the rule it proposed more than a year ago. The new rule makes it illegal for employers to include the agreements in employment contracts and requires companies with active non-compete agreements to notify their employees that they are void. The agency received more than 26,000 comments on the rule after it was proposed about 16 months ago. The rule will take effect after 120 days, although business groups have vowed to challenge the rule in court, which could delay implementation.

Scholars cite a series of studies showing that the agreements suppress workers’ wages and entrepreneurship, while also imposing costs on companies that want to hire workers bound by the agreements. A Labor Department study published in June 2022 estimated that 18 percent of Americans are bound by non-compete agreements, while other research suggests the figure could be closer to 50 percent. They are used in a wide range of industries, including technology, hair styling, medicine and even dance instruction, while imposing restrictions on both high and low wages.

The FTC estimates that banning non-compete agreements could create jobs for 30 million Americans and raise wages by nearly $300 billion per year.

“I think the FTC has done a real public service here by gathering all this evidence, making a very strong case for a complete ban and setting a new gold standard for policymaking in this area,” said Sandeep Vaheesan, legal counsel director at the Open Markets. Institute, which proposed a non-compete ban to the agency in 2019. “No employee or professional should be induced to sign any of these contracts.”

Business groups that oppose the rule, such as the U.S. Chamber of Commerce, have said the contracts are necessary to protect proprietary information and training, and to justify investments in employees who could otherwise immediately move to a competitor. The Chamber has argued that the rule represents a “radical expansion” of the FTC’s authority and has vowed to challenge the rule in court.

Three states – California, North Dakota and Oklahoma – have banned non-compete agreements for more than a century. In recent years, 11 states and Washington, D.C., have passed laws banning the agreements for hourly workers or those who fall below a salary threshold.

But the patchwork legal landscape makes bans difficult to enforce. Some legal experts said companies include non-compete clauses in employee contracts, regardless of state bans, because they know employees and competitors will be wary of lawsuits.

Some observers fear employers will also find workarounds to the FTC rule, but Vaheesan said a federal rule will provide legal clarity and send a strong message.

“It establishes, instead of this mushy standard that exists in most states, a bright line,” he said. “So everyone knows these contracts are illegal.”

correction

An earlier version of this article incorrectly stated that the rule would take effect after 180 days. The article has been corrected.

Related Posts