FTC votes to ban noncompete clauses that bar employees from working for competitors

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FTC votes to ban noncompete clauses that bar employees from working for competitors

Federal Trade Commission Chair Lina Khan testifies before a House Judiciary Committee hearing on Oversight of the Federal Trade Commission, on Capitol Hill in Washington, D.C., July 13, 2023.

Kevin Wurm | Reuters

The Federal Trade Commission on Tuesday voted 3-2 for a nationwide ban against noncompete agreements, which companies use to prevent employees from taking jobs with competitors in the same industry.

The new rule is slated to go into effect 120 days after it is officially published in the Federal Register, though business groups are expected to challenge it. Within hours of the vote, the U.S. Chamber of Commerce pledged to sue the agency over the rule.

If officially implemented, the rule will not only prohibit new noncompete clauses, but will also force companies to scrap their existing noncompetes for all employees except senior executives who earn more than $151,164 annually and who are in policy-making roles.

“Workers ought to have the right to choose who they want to work for,” President Joe Biden said Tuesday.

The FTC estimates that 30 million American workers, or roughly 18%, are currently subject to a noncompete.

The noncompete provision of an employee’s contract may prevent someone from going to work for a competing company within the same industry, in pursuit of a better career opportunity, higher compensation or a more suitable geographic location.

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said Federal Trade Commission Chair Lina Khan in a press release. 

The FTC initially proposed the noncompete ban in January 2023. It has since received over 26,000 comments on the proposal, the large majority of which were in support, according to the agency.

The FTC claims that noncompetes impede the efficiency of the labor market and can lead to “increased market concentration and higher prices for consumers.”

Meanwhile, business trade groups claim that noncompetes help preserve intellectual property and company secrets. The FTC suggests that companies lean on other avenues like non-disclosure agreements to secure proprietary information.

Tuesday’s vote comes as the latest move from an FTC that has been at the forefront of President Joe Biden’s broader crusade against corporate behemoths and the rules that help them dominate markets.

The agency, along with the Department of Justice’s antitrust division, has filed dozens of lawsuits against proposed corporate deals over the past several years.

In March, Biden launched a task force on corporate pricing practices, to be jointly led by the FTC, an independent agency, and the DOJ. Biden has repeatedly accused companies of artificially keeping prices high, in part to help the president explain why inflation has remained so sticky over the past several years.

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