Federal regulators on Tuesday issued a countrywide prohibition on new noncompete agreements, which prevent millions of Americans—from minimum-wage workers to CEOs—ffrom changing jobs within their industry.
The new rule banning noncompetes for all workers has been approved by the Federal Trade Commission. The vote, which took place on Tuesday afternoon, resulted in a 3-to-2 decision in favor of the new regulation. These changes will take effect in 120 days. It’s important to note that existing noncompetes can still be enforced for senior executives, but for all other employees, existing noncompetes will no longer hold any legal weight.
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According to FTC Chair Lina Khan, the antitrust and consumer protection agency received feedback from numerous individuals who claimed to have suffered from the negative impacts of noncompete agreements. This serves as a clear illustration of how these agreements are depriving people of their economic freedom.
The rule was voted on by the FTC commissioners, and it is worth noting that their votes fell along party lines. The two Republican commissioners opposed the rule, stating that the agency did not have the authority to implement it and that any such action should be taken by Congress instead.
The U.S. Chamber of Commerce wasted no time in expressing its opposition to the vote, announcing its intention to file a lawsuit against the “unnecessary and unlawful rule.” In a statement, the trade group, which represents American businesses, emphasized the potential negative impact on the competitiveness of these businesses, warning other agencies that such overreach would not be tolerated.
Why it matters
According to Heidi Shierholz, a labor economist and president of the Economic Policy Institute, a left-leaning think tank, the implementation of this new rule has the potential to affect a significant number of workers, potentially impacting tens of millions of individuals.
According to CBS MoneyWatch, nonunion workers have limited bargaining power and their only option is to leave their job. As economist Shierholz explains, noncompete agreements not only prevent individuals from accepting new job offers but also hinder their ability to start their own businesses.
The Federal Trade Commission (FTC) has received an overwhelming response of over 26,000 public comments on the proposed new rule. In a statement, the FTC announced that the final rule, if implemented, would effectively prohibit the majority of employers from utilizing noncompete clauses.
More than two years have passed since President Biden issued a directive to the agency, instructing them to address the unjust use of noncompete agreements. These agreements, which require employees to forfeit future job prospects in their field to maintain their current position, have been a major concern. The president’s executive order specifically called on the FTC to focus on these labor restrictions and other practices that unduly limit employees’ ability to seek alternative employment opportunities.
“The ability to switch jobs freely is fundamental to both economic freedom and a robust, competitive economy,” Khan emphasized, underscoring the need to eliminate noncompete agreements. She explained, “These agreements hinder employees from transitioning to new positions, preventing them from accessing higher wages and improved working conditions. Additionally, businesses are deprived of a valuable talent pool necessary for growth and expansion.”
A threat to trade secrets?
Approximately 30 million individuals, which accounts for one in every five American workers, are currently subject to noncompete agreements, as reported by the FTC. The implementation of this new regulation has the potential to increase workers’ wages by approximately $300 billion annually, according to the agency.
Employers who utilize noncompetes claim that they are necessary to safeguard trade secrets or other confidential information that employees may acquire while on the job. However, according to the findings of the FTC staff, corporations that are concerned about protecting their intellectual assets can employ alternative measures like confidentiality agreements and trade secret laws, eliminating the need for noncompete agreements.
The final rule by the commission does not invalidate current noncompetes with senior executives. Senior executives are individuals who earn more than $151,164 annually and hold a policy-making position. Regulators state that these executives are more inclined to negotiate the terms of their compensation.
The use of noncompetes as a means of safeguarding business information from competitors has become increasingly common, as highlighted by Shierholz. She mentioned a well-known case involving the popular restaurant chain, Jimmy John’s.
Restrictive work agreements are now impacting low-paid workers the most. These agreements can prevent employees, such as janitors, security guards, and phlebotomists, from seeking better-paying jobs, even though these entry-level workers have the least access to trade secrets.
Real-life consequences
The FTC provided real-life examples of how noncompete agreements can harm workers as it laid out its reasoning for prohibiting these agreements in the labor market.
One example involves a single father who was working as a security guard for a Florida firm, earning approximately $11 per hour. Unfortunately, he had to quit his job shortly after starting because he couldn’t find suitable childcare. Several months later, he managed to secure another security guard position at a bank, where he earned almost $15 per hour. However, his employment was abruptly terminated when the bank received a letter from his previous employer, stating that he had signed a two-year noncompete agreement.
During the 2008 financial crisis, a textile company’s factory manager experienced a significant decrease in his income. Despite receiving a job offer with better prospects and a substantial salary increase from a rival textile company, he was unable to accept it due to his noncompete agreement. The Federal Trade Commission (FTC) reported that he was entangled in a lengthy legal dispute that lasted for three years, resulting in the depletion of his savings.
