What to know about the FTC ban on noncompete agreements

The Federal Trade Commission voted 3-2 Tuesday to ban most noncompete agreements, a watershed moment for the U.S. workforce that faces an uncertain future.

These common agreements currently bar employees from leaving to work for competitors or start a competing business. The new rule prevents companies to use them moving forward, and it retroactively wipes out most existing agreements.

The agency says the new rule will give tens of millions of American workers more freedom to change jobs and seek higher pay, as well as promote competition and entrepreneurship in the U.S. economy.

But big business groups are already preparing to block the new rule from taking effect. They say noncompete agreements are necessary to protect trade secrets and that the agency has overstepped its authority.

Here are the most important things to know from Tuesday’s vote.

What does the final rule say?

The final rule would ban new noncompete agreements for all workers.

Companies will also have to throw out existing noncompete agreements for most employees. In a change from the original proposal, noncompete agreements covering senior executives may remain in effect.

“This could have a profound impact on employers that utilize these clauses,” said Stefan Meisner, a partner in Crowell & Moring’s antitrust and competition group.

“These clauses are used widely and companies now must plan for eventual compliance under the rule when it becomes effective, and evaluate any changes needed with respect to their employee agreements going forward.”

FTC votes to ban noncompete agreements

Melissa McDonagh, a shareholder at Littler and co-chair of the firm’s unfair competition and trade secrets practice group, laid out the options for employers who still want to protect their proprietary information.

“Employers concerned about the FTC rule and broader legislative and regulatory efforts to restrict the use of noncompete agreements may look to other options to protect their confidential information and business relationships. This could include non-disclosure and non-solicitation agreements, though it’s still important to ensure that those agreements comply with local, state and federal laws,” McDonagh said.

How many workers are covered?

Around 18 percent of the U.S. workforce is covered by noncompete agreements, approximately 30 million people, according to FTC estimates. They can apply at all levels of the company, from minimum-wage workers to CEOs.

The agency estimates banning noncompetes could increase worker pay by a collective $300 billion each year and lead to the creation of more than 8,500 new businesses each year.

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC Chair Lina Khan, who was appointed by President Biden.

“The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

When will it go into effect?

The final rule is slated to go into effect 120 days after it’s published in the Federal Register, though a lawsuit could extend that timeline.

“It is possible that a trade association or individual business would file a lawsuit in federal court seeking to stop the enforcement of the rule in the near term. Until a court issues some sort of immediate relief to such a lawsuit, the 120-day clock will move along until the effective date of the rule, at which time the rule comes into force,” Meisner said.

But the U.S. Chamber of Commerce, the influential pro-business lobbying group, has already promised to sue the FTC to block the rule from taking effect.

Who opposes the final rule, and why?

Chamber President and CEO Suzanne Clark called the new rule “a blatant power grab that will undermine American businesses’ ability to remain competitive.”

“This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy,” Clark said. “The Chamber will sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked.”

The Chamber isn’t the only business group that opposes the final rule.

Greg Hoff, associate counsel and director of labor and employment policy at the HR Policy Association, said that while they were “encouraged” by the carveout for existing noncompete agreements for senior executives, the trade association is still “strongly opposed” to the final rule.

“To the extent that some companies unnecessarily use unreasonably broad non-compete agreements, such use does not justify an all-encompassing ban that inhibits all employers from protecting investments in accordance with well-established law,” Hoff said.

Will Congress pass a bill to ban noncompete agreements?

Congress has not given the FTC explicit authority to ban noncompetes, though there have been several bipartisan bills introduced to reform noncompete agreements.

Sens. Chris Murphy (D-Conn.), Todd Young (R-Ind.), Tim Kaine (D-Va.) and Kevin Kramer (R-N.D.) have introduced the Workforce Mobility Act, which limits the use of noncompete agreements. Sens. Marco Rubio (R-Fla.) and Maggie Hassan (D-N.H.) have also introduced the Freedom to Compete Act.

“If we want to continue to grow our economy, we must protect and empower American workers,” Kaine said after the vote.

“I’m glad the Federal Trade Commission is taking this step to ban non-compete agreements, which stifle wage growth, hinder job mobility, and make it harder for businesses to hire talent. This will expand job opportunities for more Americans, increase wages, promote innovation, and support our country’s economic growth,” Kaine said.

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