Federal Trade Commission Approves Ban Of Noncompete Agreements

The Federal Trade Commission on Tuesday voted 3-2 in favor of adopting a historic and far-reaching ban on noncompete agreements, potentially giving more leverage in the job market to millions of U.S. workers.

The agency has said that the agreements, in which workers are forbidden from seeking a job with a competing business for a certain period of time, lead to an “unfair method of competition” and violate federal law. The vote by the agency’s five commissioners this week means the ban will move forward.

The FTC’s three Democratic members were in favor of adopting the regulation, while its two Republican members were against it.

Noncompetes have been under fire for years because of the way they can lock workers into jobs and suppress wages by reducing mobility in the labor market. And they are not strictly the domain of well-compensated executives and engineers; these days, even fast-food workers can find themselves barred from taking a job at a competing business.

Lina Khan, the commission’s chair and a progressive appointee of President Joe Biden, said Tuesday that non-compete clauses “keep wages low, suppress new ideas, and rob the American economy of dynamism.”

“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,” Khan said.

The agency estimated that the ban would boost wages by between $400 billion and $488 billion over 10 years, and lead to the creation of more than 8,500 new businesses per year.

Business groups are expected to challenge the legality of the ban and seek to have a judge block it from taking effect. The commission’s two dissenting members argued that the agency was stepping beyond its authority in issuing the ban, saying such powers should be left with the Congress.

The U.S. Chamber of Commerce has called the ban “blatantly unlawful,” and its president publicly vowed to fight it in court “if necessary.” Employers often argue that noncompetes are necessary to protect the investments they’ve made in training workers.

A handful of states have already outlawed noncompete agreements, while others have limited their scope. Some have sanctioned the agreements for high earners but restricted them for workers earning less than a certain amount.

The FTC’s rule does not include a salary threshold. It would render existing noncompetes unenforceable for the vast majority of workers, though they could still apply to senior executives, whom the agency estimated to comprise less than 1% of the workforce. New noncompetes would be banned even for executives.

Ben Cady, an FTC attorney who helped develop the rule, said during Tuesday’s hearing that the agency received more than 26,000 public comments on the proposal, with 25,000 of them supportive of the ban. The experiences people shared ― being stuck in crummy jobs, fearing litigation if they tried to leave ― provided “strong qualitative evidence” backing up the agency’s research, Cady added.

“These workers are coerced into staying in jobs they want to leave because they have no other options that don’t harm them in some way,” he said.

When proposing the rule, the FTC noted that noncompetes could hurt low-wage workers in particular, citing use of the contracts at the sandwich chain Jimmy John’s, which HuffPost had revealed in 2014.

The Jimmy John’s noncompete barred workers from taking a job at a competing business within two years of leaving. It defined a competitor as any business that is located within 3 miles of a Jimmy John’s and derives at least 10% of its revenue from “submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches.”

Biden had urged the FTC to take action against noncompete agreements not long after taking office, signing an executive order in July of 2021.

“These aren’t just high-paid executives or scientists who hold secret formulas for Coca-Cola so Pepsi can’t get their hands on it,” Biden said then. “They’re construction workers, hotel workers, disproportionately women and women of color.”