Federal regulators on Tuesday enacted a nationwide ban on new noncompete agreements, which keep millions of Americans — from minimum-wage earners to CEOs — from changing jobs within their industries.
The Federal Trade Commission on Tuesday afternoon voted 3-to-2 approve the new rule, which will ban noncompetes for all workers when the regulations take effect in 120 days. For senior executives, existing noncompetes can remain in force. For all other employees, existing noncompetes are not enforceable.
The FTC heard from thousands of people who said they had been harmed by noncompetes, illustrating how the agreements are “robbing people of their economic liberty,” FTC Chair Lina Khan said.
The FTC commissioners voted along party lines, with its two Republicans arguing the agency lacked the jurisdiction to enact the rule and that such moves should be made in Congress.
Why it matters
The new rule could impact tens of millions of workers, said Heidi Shierholz, a labor economist and president of the Economic Policy Institute, a left-leaning think tank.
“For nonunion workers, the only leverage they have is their ability to quit their job,” Shierholz told CBS MoneyWatch. Noncompetes don’t just stop you from taking a job — they stop you from starting your own business.
Since proposing the new rule, the FTC has received more than 26,000 public comments on the regulations. The final rule being considered “would generally prevent most employers from using noncompete clauses,” the FTC said in a statement last week. It remains to be seen under what circumstances restrictions would remain legal.
The agency’s action comes more than two years after President Biden directed the agency to “curtail the unfair use” of noncompetes, under which employees effectively sign away future work opportunities in their industry as a condition of keeping their current job. The president’s executive order urged the FTC to target such labor restrictions and others that improperly constrain employees from seeking work.
Still, the rule is virtually certain to be challenged in court, with the U.S. Chamber of Commerce in the past calling it “blatantly unlawful. The trade group, which advocates for U.S. corporations and businesses, did not immediately respond to a request for comment.
“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” Khan said in a statement making the case for axing noncompetes. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.”
A threat to trade secrets?
An estimated 30 million people — or one in five U.S. workers — are bound by noncompete restrictions, according to the FTC. The new rule could boost worker wages by a total of nearly $300 billion a year, according to the agency.
Employers who use noncompetes argue that they are needed to protect trade secrets or other confidential information employees might learn in the course of their jobs.
The idea of using noncompetes to keep business information out of the hands of rivals has proliferated, noted Shierholz, citing a notorious case involving Jimmy John’s eateries.
Low-paid workers are now the hardest hit by restrictive work agreements, which can forbid employees including janitors, security guards and phlebotomists from leaving their job for better pay even though these entry-level workers are least likely to have access to trade secrets.
