Federal regulators on Tuesday enacted a nationwide ban on new
noncompete agreements, which keep millions of Americans — from
minimum-wage earners to CEOs — from switching jobs within their
industries.
The Federal Trade Commission on Tuesday afternoon voted 3-to-2 to approve the new rule,
which will ban noncompetes for all workers when the regulations take
effect in 120 days. For senior executives, existing noncompetes can
remain in force. For all other employees, existing noncompetes are not
enforceable.
The antitrust and consumer protection agency heard
from thousands of people who said they had been harmed by noncompetes,
illustrating how the agreements are "robbing people of their economic
liberty," FTC Chair Lina Khan said.
The FTC commissioners voted along party lines, with its two
Republicans arguing the agency lacked the jurisdiction to enact the rule
and that such moves should be made in Congress.
Within hours of
the vote, the U.S. Chamber of Commerce said it would sue to block "this
unnecessary and unlawful rule and put other agencies on notice that such
overreach will not go unchecked." The new rule would "undermine
American businesses' ability to remain competitive," the trade group,
which advocates for U.S. corporations and businesses, said in a
statement.
Why it matters
The new rule could impact tens of millions of
workers, said Heidi Shierholz, a labor economist and president of the
Economic Policy Institute, a left-leaning think tank.
"For
nonunion workers, the only leverage they have is their ability to quit
their job," Shierholz told CBS MoneyWatch. "Noncompetes don't just stop
you from taking a job — they stop you from starting your own business."
Since proposing the new rule,
the FTC has received more than 26,000 public comments on the
regulations. The final rule adopted "would generally prevent most
employers from using noncompete clauses," the FTC said in a statement.
The agency's action comes more than two years after President Biden directed the agency to "curtail the unfair use"
of noncompetes, under which employees effectively sign away future work
opportunities in their industry as a condition of keeping their current
job. The president's executive order urged the FTC to target such labor
restrictions and others that improperly constrain employees from
seeking work.
"The freedom to change jobs is core to economic liberty and to a
competitive, thriving economy," Khan said in a statement making the case
for axing noncompetes. "Noncompetes block workers from freely switching
jobs, depriving them of higher wages and better working conditions, and
depriving businesses of a talent pool that they need to build and
expand."
A threat to trade secrets?
An estimated 30
million people — or one in five U.S. workers — are bound by noncompete
restrictions, according to the FTC. The new rule could boost worker
wages by a total of nearly $300 billion a year, according to the agency.
Employers
who use noncompetes argue that they are needed to protect trade secrets
or other confidential information employees might learn in the course
of their jobs.
"It'll represent a sea change," said Amanda
Sonneborn, a partner at King & Spalding in Chicago who represents
employers that use noncompetes. "They don't want somebody to go to a
competitor and take their customer list or take their information about
their business strategy to that competitor."
Yet corporations
concerned about protecting their intellectual assets can use restraints
such as confidentiality agreements and trade secret laws, and don't need
to resort to noncompete agreements, the FTC staff determined.
The
commission's final rule does not nullify existing noncompetes with
senior executives, who are defined as those earning more than $151,164 a
year and who hold a policy-making position. Those execs are much more
likely to negotiate the terms of their compensation, according to
regulators.
Still, the FTC is banning new noncompetes for senior
executives on the grounds that the agreements stifle competition and
discourage employees from creating new businesses, potentially harming
consumers.
The idea of using noncompetes to keep business information out of the
hands of rivals has proliferated, noted Shierholz, citing a notorious
case involving Jimmy John's eateries.
Low-paid workers are now the hardest hit by restrictive work agreements, which can forbid employees including janitors, security guards and phlebotomists from leaving their job for better pay even though these entry-level workers are least likely to have access to trade secrets.
Real-life consequences
In
laying out its rationale for banishing noncompetes from the labor
landscape, the FTC offered real-life examples of how the agreements can
hurt workers.
In one case, a single father earned about $11 an
hour as a security guard for a Florida firm, but resigned a few weeks
after taking the job when his child care fell through. Months later, he
took a job as a security guard at a bank, making nearly $15 an hour. But
the bank terminated his employment after receiving a letter from the
man's prior employer stating he had signed a two-year noncompete.
In
another example, a factory manager at a textile company saw his
paycheck dry up after the 2008 financial crisis. A rival textile company
offered him a better job and a big raise, but his noncompete blocked
him from taking it, according to the FTC. A subsequent legal battle took
three years, wiping out his savings.
—The Associated Press contributed to this report.