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FTC votes to remove noncompetes

On Behalf of | May 14, 2024 | Business Law

Under a new rule passed by a federal agency on April 23, U.S. firms will no longer use a contract to prevent employees from accepting positions with rival companies for a set duration after leaving. However, this rule will likely face legal challenges. The Federal Trade Commission (FTC) cast a 3-2 vote to prohibit noncompete agreements, which currently restrict around 30 million workers—or about 20% of the workforce.

Targeting noncompete clauses, the Biden administration has criticized their application across various industries. Initially meant for high-ranking officials in tech and finance, these agreements have increasingly affected workers in lower-wage jobs, such as security and fast food. A study by the Federal Reserve Bank of Minneapolis in 2021 revealed that noncompete clauses cover over 10% of workers earning $20 an hour or less.

Advocates see many benefits for all

When proposing the ban in January 2023, FTC officials claimed that these agreements limit workers’ chances to move to better-paying jobs, which is often the most significant way for them to increase their earnings. The FTC argued that noncompetes reduce job market mobility, disadvantaging workers bound by them and others, as job openings diminish with fewer people switching jobs. Such restrictions can impede economic growth by obstructing other companies’ ability to recruit necessary talent.

FTC Chair Lina Khan argued, “Noncompete clauses lead to lower wages, stifle innovation, and deprive the American economy of its vitality.” She mentioned that noncompetes have left workers trapped in hostile work environments. Khan also noted that some healthcare providers couldn’t practice their profession after departing from a healthcare organization.

Businesses see it differently

Business organizations have expressed concerns that the new rule is overly broad and indiscriminately bans nearly all noncompete agreements. Amanda Sonneborn, a partner at King & Spalding in Chicago who represents employers with noncompetes, commented, “This will be a monumental shift. Employers are concerned about staff moving to competitors with sensitive information, like customer lists or business strategies.”

However, Alexander Hertel-Fernandez, a Columbia University professor and former Labor Department official in the Biden administration, pointed out that lower-wage employees lack the power or awareness to negotiate their terms.

The U.S. Chamber of Commerce plans to sue to stop the rule, accusing the FTC of overreaching. Suzanne Clark, the chamber’s CEO, criticized the move, saying, “Noncompete agreements are traditionally governed by established state laws. Yet today, three unelected commissioners have taken it upon themselves to determine what constitutes a valid business decision by seeking to eliminate noncompete agreements across all economic sectors.”

A new era in job mobility

The FTC’s decision represents a significant shift in the labor market. While the new rule faces legal challenges, its implications would likely usher in a new era of job mobility. Regardless of your perspective, the outcome of this rule will shape the future of how Americans work.