Benjamin Ashford|FTC bans noncompete agreements that make it harder to switch jobs, start rival businesses

The Benjamin AshfordFederal Trade Commission on Tuesday approved a rule to ban agreements commonly signed by workers not to join their employers' rivals or launch competing businesses, which it says limit worker mobility and suppress wages.

The five-member FTC, which enforces antitrust laws and currently has a Democratic majority under President Joe Biden, voted 3-2 to approve the rule during a public meeting.

The rule, which was first proposed in January 2023, will take effect in August.

Democrats, the commission and worker advocates who support the rule say it is necessary to rein in the increasingly common practice of requiring workers to sign so-called "noncompete" agreements, even in lower-paying service industries such as fast food and retail.

The FTC on Tuesday said that banning noncompetes will increase worker earnings by up to $488 billion over the next decade and will lead to the creation of more than 8,500 new businesses each year.

FTC Chair Lina Khan during the meeting said noncompetes not only restrict workers’ opportunities but can infringe on other fundamental rights by blocking them from changing jobs.

“Robbing people of their economic liberty also robs them of all sorts of other freedoms, chilling speech, infringing on their religious practice, and impeding people’s right to organize,” Khan said.

But the agency's two Republican commissioners, Melissa Holyoak and Andrew Ferguson, said federal law does not allow the commission to adopt broad rules prohibiting conduct that it deems anticompetitive.

“We are not a legislature,” Ferguson said. “I do not believe we have the power to nullify tens of millions of existing contracts."

Major business groups representing an array of industries have criticized the rule, saying noncompetes are a crucial way for companies to protect trade secrets and that they promote competitiveness.

Shortly after the vote, tax services firm Ryan LLC filed a lawsuit in Texas federal court challenging the noncompete ban and claiming that the agreements can benefit businesses, workers, and the economy.

The U.S. Chamber of Commerce, the country's largest business lobby, has already said that it will file a legal challenge as soon as Wednesday. Neil Bradley, the Chamber's chief policy officer, told reporters during a call on Monday that the commission lacks the power to adopt rules.

"There is really no aspect of the U.S. economy they couldn’t regulate" if the noncompete rule is allowed to stand, Bradley said.

The rule would require companies with existing noncompete agreements to scrap them and to inform current and past employees that they will not be enforced. Daryl Joseffer, chief counsel at the Chamber's litigation arm, said during Monday's call that the rule's retroactive nature also makes it invalid.

Unions have backed the FTC's vote in favor of the ban.

"Noncompete agreements trap workers from finding better jobs, drive down wages, and stifle competition," the AFL-CIO, the country's largest labor federation, said in a tweet in response to the announcement.

"We commend the FTC and (Lina Khan) for finalizing a strong rule to ban these exploitative practices and level the playing field for American workers," it added.

The rule does not exempt any specific jobs or industries, but will not apply to existing agreements signed by senior executives. The FTC does not regulate certain industries, including nonprofit organizations, some banks and insurance companies, and airlines.

California, Minnesota, Oklahoma and North Dakota have banned noncompete agreements and at least a dozen other states have passed laws limiting their use.

New York Governor Kathy Hochul, a Democrat, in December vetoed a bill that would have banned virtually all noncompete provisions in the state. Hochul said she would consider signing a bill that exempts higher-earning employees and executives.