The Federal Trade Commission on Tuesday issued a final rule that will ban for-profit US employers from making employees sign agreements with noncompete clauses. Such a ban could affect tens of millions of workers.
President Joe Biden soon after the announcement said, “the FTC is cracking down on ‘non-compete agreements,’ contracts that employers use to prevent their workers from changing jobs even if that job will pay a few dollars more, or provide better working conditions. Workers ought to have the right to choose who they want to work for.”
The FTC’s decision was the result of a 3-to-2 vote among its five commissioners Tuesday afternoon. The two commissioners who dissented from the majority said they believed the rule to be “unlawful” and “won’t survive legal challenge.” The US Chamber of Commerce has already said it will sue the FTC as early as this week for what it views as the agency exceeding its administrative authority.
The FTC estimates that 30 million people – one in five US workers – are bound by a noncompete clause in their current jobs. And for most of them, the agency asserts, such a clause restricts them from freely switching jobs, lowers wages, stifles innovation, blocks entrepreneurs from starting new businesses and undermines fair competition.
The final rule will ban for-profit employers from issuing new noncompetes to anyone.
And – with one exception – it makes currently existing noncompete agreements unenforceable after the rule’s effective date, which is set at 120 days from the rule’s publication in the Federal Register.
The rule, however, does allow currently existing noncompete agreements for senior executives to remain in force. Senior executives are defined as workers earning more than $151,164 annually who also are in a “policy-making position.”
An FTC staff member presenting the final rule to the commissioners during Tuesday’s meeting characterized noncompete agreements as “exploitative and coercive” for employees other than senior executives. Typically, senior executives are more likely to have a lawyer represent them in contract negotiations and secure compensation in exchange for signing a noncompete agreement. Whereas rank-and-file employees normally don’t negotiate such agreements, which may be presented to them along with other paperwork on their first day on the job.
The FTC contends that businesses seeking to protect their trade secrets and other confidential information can do so through the use of confidentiality clauses.
The ban would apply nationwide, overriding state laws regarding noncompete agreements. Currently three states (California, North Dakota and Oklahoma) plus Washington, D.C., already have near-complete bans on the books, while some other states – such as Colorado, Maryland, Oregon and Rhode Island – allow them but only within certain parameters, such as limiting them to high-wage earners, said Stefanie Camfield, assistant general counsel at Engage PEO, a human resources services firm.
The FTC estimates that its ban would boost wages and benefits by up to $488 billion over a decade.
This is breaking news and will be updated.
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