On Tuesday, federal regulators implemented a nationwide prohibition on new noncompete agreements. These agreements, which prevent individuals from changing jobs within their industries, affect a wide range of Americans, including minimum-wage workers and CEOs. The ban aims to provide more freedom and mobility for employees in choosing their career paths.
The Federal Trade Commission has approved a new rule, with a 3-to-2 vote, that will ban noncompetes for all workers within 120 days of the regulations taking effect. However, existing noncompetes can still be enforced for senior executives. For all other employees, existing noncompetes will no longer be enforceable.
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According to FTC Chair Lina Khan, the antitrust and consumer protection agency has received feedback from numerous individuals who claim to have suffered from the negative effects of noncompete agreements. This serves as evidence that these agreements are depriving people of their economic freedom.
The rule was voted on by the FTC commissioners, and it was a party-line vote. The two Republican commissioners believed that the agency did not have the authority to implement such a rule and that decisions like this should be made by Congress.
The U.S. Chamber of Commerce swiftly responded to the vote by announcing its intention to file a lawsuit in order to prevent the implementation of what it deems an “unnecessary and unlawful rule.” In a statement, the trade group, which represents American businesses, expressed concerns that the new rule could undermine the competitiveness of these businesses. The Chamber of Commerce also emphasized that it wants to send a clear message to other agencies that such overreach will not be tolerated.
Why it matters
Heidi Shierholz, a labor economist and president of the Economic Policy Institute, a left-leaning think tank, stated that the implementation of the new rule could have a significant impact on a large number of workers, potentially affecting tens of millions of individuals.
According to CBS MoneyWatch, nonunion workers have limited bargaining power, as their only option is to quit their job. As stated by Shierholz, noncompetes not only prevent individuals from accepting a new job but also hinder their ability to start their own business.
The Federal Trade Commission (FTC) has received over 26,000 public comments on the regulations since they proposed the new rule. In a statement, the FTC explained that the final rule they adopted would generally prohibit most employers from using noncompete clauses.
More than two years ago, President Biden issued a directive to the agency, urging them to reduce the unfair use of noncompete agreements. These agreements require employees to forfeit future work opportunities in their field as a condition of keeping their current job. In response, the FTC has taken action to address these labor restrictions and other practices that limit employees’ ability to seek employment.
“The ability to change jobs is essential for economic freedom and a vibrant, competitive economy,” Khan emphasized, advocating for the elimination of noncompete agreements. She argued that these agreements restrict workers from freely transitioning between jobs, preventing them from accessing higher wages and improved working conditions. Additionally, noncompetes hinder businesses from accessing a diverse talent pool necessary for growth and expansion.”
A threat to trade secrets?
According to the Federal Trade Commission (FTC), approximately 30 million individuals, which accounts for one in five workers in the United States, are currently subjected to noncompete restrictions. In a significant development, the introduction of a new rule has the potential to increase worker wages by nearly $300 billion annually, as stated by the agency.
Employers who utilize noncompetes claim that they are necessary in order to safeguard trade secrets or other confidential information that employees may acquire during their employment. However, the FTC staff has determined that corporations can effectively protect their intellectual assets through alternative measures such as confidentiality agreements and trade secret laws, rendering noncompete agreements unnecessary.
According to regulators, the final rule from the commission does not invalidate current noncompetes with senior executives. Senior executives are defined as individuals who earn over $151,164 per year and hold a policy-making position. It is noted that these executives have a higher likelihood of negotiating the terms of their compensation.
The FTC is implementing a ban on new noncompete agreements for senior executives. The rationale behind this decision is that such agreements hinder competition and discourage employees from venturing into new business ventures, which can ultimately have a negative impact on consumers.
According to Shierholz, the use of noncompetes to prevent competitors from accessing business information has become widespread. She mentioned a well-known case involving Jimmy John’s eateries as an example.
Low-wage workers are facing the most significant challenges due to restrictive employment contracts. These agreements, which can prevent employees like janitors, security guards, and phlebotomists from seeking better paying jobs, are disproportionately affecting entry-level workers who often lack access to valuable trade secrets.
Real-life consequences
The FTC provided real-life examples to illustrate the detrimental impact of noncompete agreements on workers.
A single father, who was earning approximately $11 an hour as a security guard for a Florida company, had to resign from his job shortly after starting due to the lack of available childcare. Several months later, he managed to secure a position as a security guard at a bank, where he received a higher wage of nearly $15 an hour. Unfortunately, the bank decided to terminate his employment after receiving a letter from his previous employer, which highlighted that he had signed a two-year noncompete agreement.
During the 2008 financial crisis, a factory manager at a textile company experienced a significant decrease in his paycheck. He had the opportunity to secure a better job and a substantial raise at a rival textile company. However, his noncompete agreement prevented him from pursuing this opportunity, as reported by the FTC. The ensuing legal dispute lasted for three years, resulting in the depletion of his savings.
