FTC Votes to Ban Noncompete Agreements for Nearly All Workers
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Updated on Aug. 20.
A federal judge in Texas has blocked the Federal Trade Commission from implementing a new rule that aimed to ban companies from starting any new noncompete agreements with current or former employees or enforcing existing noncompete agreements, according to Bloomberg News and other outlets. Judge Ada Brown ruled in favor of Ryan LLC, a tax consulting firm that sued to block the ruling the day it was issued, in the Northern District of Texas. The rule was due to go into effect Sept. 4.
Brown had granted a preliminary injunction against the rule on July 3. The FTC can appeal.
The Federal Trade Commission voted on Tuesday to ban noncompete agreements, which prohibit people from working for their employers’ competitors — or starting a competing business — after they leave their job.
The FTC estimates that roughly 30 million workers, or 1 in 5 U.S. adults, are in a noncompete agreement. Four states already ban noncompete agreements and 33 others, plus Washington D.C., restrict them in some way, according to the Economic Innovation Group, a public policy research organization that’s tracking states’ noncompete agreement laws.
The federal rule was proposed in January, triggering a 90-day public comment period. The FTC said that more than 26,000 comments were received — over 25,000 of them in favor of the rule change. The final rule was passed on a 3-2 vote.
The new rule would go into effect 120 days after it’s published in the Federal Register. Legal challenges are expected, which could delay or prevent the rule from being enacted.
What’s in the rule?
Under the rule, companies would be banned from starting any new noncompete agreements with current or former employees.
Companies would be allowed to enforce existing noncompetes only for senior executives, which the FTC defines as an employee in a policy-making position who’s earning at least $151,164 per year.
For all other existing noncompetes, employers would have to tell current or former employees that their noncompete won’t be enforced.
Why does this matter?
The FTC estimates that the new rule would result in a 2.7% increase in new businesses formed each year.
Additionally, the FTC says the rule would increase the average U.S. worker’s earnings by $524 per 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,” Lina Khan, chair of the FTC, said in a statement announcing the rule.
What’s next?
The U.S. Chamber of Commerce said it will sue the FTC to prevent the rule from being enacted.
The chamber’s president and CEO, Suzanne Clark, called the FTC’s rule “a blatant power grab that will undermine American businesses’ ability to remain competitive.”
Opposition from other pro-business trade associations and groups is expected in the coming days.
