The United States Federal Trade Commission building in Washington, DC
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The United States Federal Trade Commission building in Washington, DC
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After receiving more than 26,000 public comments, the five-member Federal Trade Commission is scheduled to vote Tuesday on whether to issue a final rule banning noncompetes, declaring them an unfair method of competition.
In a statement last week, the FTC said the final rule under consideration would “generally prevent most employers from using non-compete clauses.” It is not yet clear how the final rule differs from the version first proposed in January 2023.
A non-compete agreement generally prevents a worker from going to work for a competitor or starting their own competing business. The FTC estimates that about 30 million people, or one in five American workers, from minimum wage earners to CEOs, are bound by noncompetes.
The Biden administration has argued that these agreements hurt workers by reducing wages and hurt the U.S. economy by stifling entrepreneurship.
“The freedom to change jobs is essential to economic freedom and a competitive and prosperous economy,” FTC Chair Lina M. Khan said in a statement when introducing the proposed rule. “Non-competes prevent workers from freely changing jobs, depriving them of higher wages and better working conditions, and depriving companies of a talent pool they need to build and grow.”
The Federal Trade Commission, chaired by Lina M. Khan, will vote Tuesday, April 23, on whether to issue a proposed final rule that would prevent most employers from imposing noncompetes on workers.
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The Federal Trade Commission, chaired by Lina M. Khan, will vote Tuesday, April 23, on whether to issue a proposed final rule that would prevent most employers from imposing noncompetes on workers.
Saul Loeb/Getty Images
The companies say non-competes are essential to protecting their investments and proprietary information and question whether the FTC even has the authority to regulate such agreements.
Even after today’s vote, the future of these agreements will be far from clear. If the FTC votes to issue a final rule, it would not be enforced for 180 days and legal challenges are expected.
FTC Says Non-Compete Harms Low-Wage and High-Wage Workers
Tuesday’s vote comes 15 months after the FTC first released its proposed rule, prohibiting employers from entering into non-compete agreements with their employees and requiring existing agreements to be rescinded.
In a fact sheet, the agency cited several concrete examples from the media of workers who have been harmed by such clauses.
One case involved a single father working as a security guard who was forced to resign from his $11-an-hour night job after losing access to night care. He landed a similar job with daytime shifts paying $15 an hour, but his former employer challenged his employment based on a non-compete he had signed and he was fired.
Another case involved an Amazon vice president who left the company to join a tech startup. Amazon filed a lawsuit to try to stop him from taking the new job, citing a non-compete agreement. After negative media coverage, Amazon dropped the lawsuit and the startup thrived.
Cases abound elsewhere – in the pharmaceutical industry, concierge services and even Zen yoga studios.
These cases highlight the power differential that non-compete can create, with low-wage employees often more vulnerable than those in management positions. By allowing more workers to leave their jobs for higher-paying jobs, the FTC estimates that a rule prohibiting non-competes would increase income for the U.S. workforce by up to $296 billion annually.
Business says non-competes are key to protecting investments
The U.S. Chamber of Commerce, which fiercely opposes the ban, says noncompetes benefit both employers and employees. Companies are more likely to devote resources to training and developing their workforce if they have assurance that their workers will not pass on their knowledge to a competitor, the U.S. Chamber explained in written comments to the FTC.
Contrary to the FTC’s view, the US Chamber also maintains that non-competes encourage innovation by providing stronger protection for trade secrets. Without non-competes, companies may be less willing to spend significant time and money on research and development, the group warns.
The FTC’s proposed rule included a notable exception for non-competition agreements between sellers and buyers of businesses, intended to protect the value of acquired businesses. Both parties could still enter into a non-competition agreement provided the seller had at least a 25% ownership interest in the business being sold.
But the business world says this exception is far from enough. She asked the FTC to consider other proposals, including an income threshold, so that companies can still enter into non-compete agreements with the highest-paid employees while protecting those at the extreme lower end of the pay scale.
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