Employers will be prohibited from using non-compete contracts to prevent workers from joining rival companies, regulators said today.
The Federal Trade Commission (FTC) voted 3-2 to ban measures that affect approximately one in five workers today.
Non-compete measures have historically been associated with high-level executives at technology and financial companies, but are increasingly used to target lower-paid workers, such as security guards and sandwich shop employees.
The agreements typically prohibit workers from moving to a competing company for a set period of time.
The Federal Trade Commission (FTC) voted 3-2 to ban non-compete contracts that affect approximately one in five workers today. Pictured: FTC Commissioner Lina Khan
A 2021 study by the Federal Reserve Bank of Minneapolis found that more than one in 10 workers earning $20 or less per hour are covered by non-compete agreements.
When proposing the ban in January 2023, FTC officials claimed that non-compete agreements harm workers by reducing their ability to change jobs for higher wages, a measure that often provides most workers their biggest salary increases.
By reducing overall turnover in the labor market, the agency argued, the measures also hurt workers not covered by them because there are fewer jobs available as fewer people leave their jobs.
They can also harm the broader economy by limiting the ability of other businesses to hire needed employees, the FTC said.
The agency received about 26,000 comments on the proposal, most in favor.
The rule, which does not apply to nonprofit workers, will take effect in four months unless it is blocked by legal challenges.
“We heard from employees who, because of not competing, were trapped in abusive workplaces,” FTC Chairwoman Lina Khan said before the vote.
Doctors have been prevented from practicing medicine after leaving their offices, he added.
Business groups have criticized the measure for being too broad in blocking nearly all non-competitive companies and have questioned the FTC’s authority to take the measure.
Non-compete measures have historically been associated with high-level executives at technology and financial companies, but are increasingly used to target lower-paid workers, such as security guards and sandwich shop employees.
Two Republican appointees to the FTC, Melissa Holyoak and Andrew Ferguson, voted against the proposal. They claimed the agency was exceeding its authority by passing such a broad rule.
The U.S. Chamber of Commerce has said it will sue to block the measure, a process that could prevent the rule from taking effect for months or years.
And if former President Donald Trump wins the 2024 presidential election, his administration could withdraw the rule.
The FTC prohibits noncompetes because they constitute a “method of unfair competition,” but the House says the law does not authorize the agency to regulate on those grounds.
“If they started exercising that authority, they would really be opening a Pandora’s box,” said Neil Bradley, executive vice president of the Chamber. “There are literally no limitations on what people may one day decide is a method of unfair competition.”
Noncompete agreements are banned in three states, including California, and some opponents of noncompete agreements argue that California’s ban has been a key contributor to that state’s innovative tech economy.
John Lettieri, chief executive of the Economic Innovation Group, a technology-backed think tank, argues that the ability of early innovators to leave a company and create a competitor was key to the development of the semiconductor industry.
‘The birth of so many important founding companies could not have happened, at least not in the same way or on the same timeline and definitely not in the same place, if it had not been for the ability of entrepreneurs to create their own companies or go to a better company,” Lettieri said.