New federal rule would bar ‘noncompete’ agreements for most employees
WASHINGTON — U.S. companies could no longer ban workers from taking jobs at competitors under a rule approved by a federal agency on Tuesday, although the rule is certain to be challenged in court.
The Federal Trade Commission voted 3-2 on Tuesday against measures known as non-compete agreements, which ban workers from moving to or starting competing companies for a certain period of time. According to the FTC, 30 million people – roughly one in five workers – are now subject to such restrictions.
The Biden administration has focused on non-compete measures, which are often associated with top executives at technology and financial companies but have also ensnared lower-paid workers such as security guards and sandwich shop workers in recent years. 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 rule, which does not apply to workers at nonprofits, will take effect in four months unless it is blocked by legal challenges.
“Non-compete agreements keep wages low, stifle new ideas and rob the American economy of dynamism,” said FTC Chair Lina Khan. “We heard from employees who were stuck in abusive workplaces because of non-compete.”
Some doctors, she added, have been prevented from practicing medicine after leaving practice.
Business groups have criticized the measure as casting too wide a net by blocking almost all non-competitors. They argue that highly paid executives can often receive higher wages in exchange for accepting a non-compete agreement.
“It will be a big change,” said Amanda Sonneborn, a partner at King & Spalding in Chicago, which represents employers who use non-competitors. “They don’t want someone to go to a competitor and bring their customer list or information about their business strategy to that competitor.”
But Alexander Hertzel-Fernandez, a professor at Columbia University and a former Biden administration Labor Department official, argued that lower-income workers do not have the ability to negotiate such provisions.
“When they get their job offer,” he said, “it’s basically a ‘take it or leave it as a whole,’” he said.
The U.S. Chamber of Commerce said Tuesday it will file a lawsuit to block the rule. It accused the FTC of exceeding its authority.
“Non-compete agreements are enforced or waived under established state laws governing their use,” said Suzanne Clark, the chamber’s CEO. “Yet today, three unelected commissioners unilaterally decided that they have the power to declare what is a legitimate business decision and what is not, by banning non-compete agreements in all sectors of the economy.”
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.
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 spin off and start their own businesses. companies, or go to a better company,” Lettieri said.
The White House has stepped up efforts to protect workers as the presidential campaign heats up. On Tuesday, the Department of Labor issued a rule guaranteeing overtime pay for more lower-paid workers. The rule would increase the minimum salary required to exempt an employee from overtime pay, from about $35,600 currently to nearly $43,900 effective July 1 and $58,700 effective January 1, 2025.
Companies will have to pay overtime for employees below these thresholds who work more than 40 hours per week.
“This rule will restore the promise to workers that if you work more than 40 hours a week, you should be paid more for that time,” said Acting Secretary of Labor Julie Su.