FTC bans most non-compete clauses, claiming the accounts ‘robbed people of their economic liberty’

Employers will be banned from using non-compete agreements to prevent workers from joining rival companies, regulators said today.

The Federal Trade Commission (FTC) voted 3-2 against a ban on the measures, which today affect roughly one in five workers.

Historically, non-competes have been associated with high-level executives at technology and financial companies, but they are increasingly being used to target lower-paid workers, such as security guards and sandwich shop workers.

The agreements generally prohibit employees from transferring to a competing company for a certain period of time.

A 2021 survey from the Federal Reserve Bank of Minneapolis found that more than one in 10 workers making $20 or less per hour are covered by a non-compete agreement.

When the FTC proposed the ban in January 2023, they argued that non-compete agreements harm workers by limiting their ability to change jobs for higher pay, a move that often provides the largest pay increase for most workers.

By reducing overall labor market turnover, the agency argued, the measures also penalize workers who are not covered, because fewer jobs become available as fewer people leave their jobs.

They can also harm the broader economy by limiting other companies’ ability to hire needed workers, the FTC said.

The agency received approximately 26,000 responses to the proposal, most of which were positive.

The rule, which does not apply to workers at nonprofits, will take effect in four months unless it is blocked by legal challenges.

“We heard from employees who were locked into abusive workplaces because of non-compete agreements,” Lina Khan, chair of the FTC, said before the vote.

Doctors have been prevented from practicing medicine after leaving practice, she added.

Industry groups have criticized the measure as casting too broad a net by blocking virtually all non-competitors, and have questioned the FTC’s authority to take the step.

Historically, non-competes have been associated with high-level executives at technology and financial companies, but they are increasingly being used to target lower-paid workers, such as security guards and sandwich shop workers.

Two Republican members of the FTC, Melissa Holyoak and Andrew Ferguson, voted against the proposal. They claimed the agency exceeded its authority by passing such a sweeping rule.

The U.S. Chamber of Commerce has said it will sue to block the measure, a lawsuit that could prevent the rule from taking effect for months or years.

And if former President Donald Trump wins the 2024 presidential election, his administration could repeal the rule.

The FTC bans non-compete agreements on the grounds that they constitute an “unfair method of competition,” but the House says the law does not authorize the organization to police on those grounds.

“If they were to start exercising that authority, you would essentially be opening a Pandora’s box,” said Neil Bradley, the chamber’s executive vice president. “There are literally no limits to what people can decide in a day about an unfair method of competition.”

Non-compete agreements are banned in three states, including California, and some opponents of non-compete agreements argue that California’s ban has been a major contributor to that state’s innovative technology economy.

John Lettieri, CEO of the Economic Innovation Group, a technology-backed think tank, argues that the ability of early innovators to leave one company and create a competitor was critical to the development of the semiconductor industry.

“The birth of so many important foundational companies could not have happened, at least not in the same way or on the same timeline and certainly not in the same place, if entrepreneurs had not been able to branch out and start their own businesses. companies, or go to a better company,” Lettieri said.