U.S. companies will no longer be allowed to prevent employees from working for competitors as a result of a rule approved by a federal agency on Tuesday. However, the rule is expected to face legal challenges.
On Tuesday, the Federal Trade Commission voted 3-2 to prohibit practices called noncompete agreements, which stop employees from moving to or establishing competing businesses for a specific period of time. The FTC reports that approximately 30 million people — about one in five workers — are currently bound by such restrictions.
The Biden administration has targeted noncompete regulations, which are commonly linked to senior executives at technology and financial firms, but have recently affected lower-paid workers like security guards and fast-food workers. A study in 2021 by the Federal Reserve Bank of Minneapolis revealed that over 10% of workers earning $20 or less per hour are subjected to noncompete agreements.
When the FTC first proposed the ban in January 2023, officials stated that noncompete agreements harm workers by limiting their ability to change jobs for better pay, a move that frequently results in their largest salary increases. By decreasing overall turnover in the job market, the agency argued that these measures also put workers who are not bound by them at a disadvantage, as fewer jobs become available due to fewer people leaving their positions. They can also have a negative impact on the economy as a whole by restricting other businesses from hiring needed staff, according to the FTC.
The regulation, which does not cover non-profit employees, is set to come into effect in four months unless it is obstructed by legal challenges.
“Noncompete clauses keep salaries low, stifle innovation, and hinder the dynamism of the American economy,” stated FTC Chair Lina Khan. “We heard from employees who were trapped in abusive workplaces due to noncompetes.”
She also mentioned that some doctors have been unable to practice medicine after leaving their practices.
Business groups have criticized the regulation for being too broad by prohibiting almost all noncompete agreements. They argue that highly paid executives are often able to negotiate for higher pay in exchange for accepting a noncompete.
“This will bring about a significant change,” said Amanda Sonneborn, a partner at King & Spalding in Chicago who represents employers that utilize noncompetes. “They don’t want someone to join a competitor and take their customer list or share their business strategy information with that competitor.”
However, Alexander Hertzel-Fernandez, a professor at Columbia University and a former official at the Biden administration's Labor Department, argued that lower-income workers do not have the power to negotiate over such provisions.
“When they receive a job offer,” he said, “they have to take it or leave it as a whole.
The U.S. Chamber of Commerce announced on Tuesday that it will file a lawsuit to block the regulation, alleging that the FTC has exceeded its authority.
“Noncompete agreements are either upheld or dismissed under established state laws governing their use,” said Suzanne Clark, the CEO of the chamber. “Yet today, three appointed commissioners have unilaterally decided they have the right to determine what constitutes a valid business decision by moving to ban noncompete agreements across all sectors of the economy.”
Two Republican appointees to the FTC, Melissa Holyoak and Andrew Ferguson, voted against the proposal. They said that the agency was going beyond its authority by approving such a broad rule.
Noncompete agreements are prohibited in three states, including California, and some opponents of noncompetes argue that California’s ban has been a key factor in that state’s innovative tech economy.
John Lettieri, CEO of the Economic Innovation Group, a tech-supported think tank, argues that the capacity of early innovators to leave one company and start a competitor was crucial to the growth of the semiconductor industry.
“The establishment of many important foundational companies could not have occurred, at least not in the same manner or at the same time and definitely not in the same location, if entrepreneurs were not able to spin out, start their own companies, or move to a better company,” Lettieri said.
The White House has been increasing its efforts to safeguard workers as the presidential campaign intensifies. On Tuesday, the Labor Department issued a rule that would ensure overtime pay for more low-paid workers. The rule would raise the minimum salary level required to exempt an employee from overtime pay, from about $35,600 currently to nearly $43,900 effective July 1 and $58,700 by Jan. 1, 2025.
Companies will have to pay overtime for workers below those thresholds who work more than 40 hours a week.
“This rule will bring back the commitment to workers that if you work more than 40 hours in a week, you should be compensated more for that time,” said Acting Labor Secretary Julie Su.
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