FTC bans employers from using noncompete clauses

New York CNN —

The Federal Trade Commission on Tuesday voted to ban for-profit US employers from making employees sign agreements with noncompete clauses. Such a ban could affect tens of millions of workers.

President Joe Biden soon after the announcement said, “The FTC is cracking down on ‘non-compete agreements,’ contracts that employers use to prevent their workers from changing jobs even if that job will pay a few dollars more, or provide better working conditions. Workers ought to have the right to choose who they want to work for.”

The FTC’s decision was the result of a 3-to-2 vote among its five commissioners Tuesday afternoon. The two commissioners who dissented from the majority said they believed the rule to be “unlawful” and “won’t survive legal challenge.” The US Chamber of Commerce has already said it will sue the FTC as early as this week for what it views as the agency exceeding its administrative authority.

What the final rule will do

The FTC estimates that 30 million people – one in five US workers – are bound by a noncompete clause in their current jobs. And for most of them, the agency asserts, such a clause restricts them from freely switching jobs, lowers wages, stifles innovation, blocks entrepreneurs from starting new businesses and undermines fair competition.

The final rule is a somewhat narrower version of the proposed rule that the agency put out for public comment in January of 2023.

It will ban for-profit employers from issuing new noncompetes to anyone.

And – with one exception – it makes currently existing noncompete agreements unenforceable after the rule’s effective date, which is set at 120 days from the rule’s publication in the Federal Register.

The rule, however, does allow currently existing noncompete agreements for senior executives to remain in force. Senior executives are defined as workers earning more than $151,164 annually who also are in a “policy-making position.”

An FTC staff member presenting the final rule to the commissioners during Tuesday’s meeting characterized noncompete agreements as “exploitative and coercive” for employees other than senior executives. Typically, senior executives are more likely to have a lawyer represent them in contract negotiations and secure compensation in exchange for signing a noncompete agreement. Whereas rank-and-file employees normally don’t negotiate such agreements, which may be presented to them along with other paperwork on their first day on the job.

The FTC contends that businesses seeking to protect their trade secrets and other confidential information can do so through the use of confidentiality clauses.

The ban would apply nationwide, overriding state laws regarding noncompete agreements. Currently three states (California, North Dakota and Oklahoma) plus Washington, D.C., already have near-complete bans on the books, while some other states – such as Colorado, Maryland, Oregon and Rhode Island – allow them but only within certain parameters, such as limiting them to high-wage earners, said Stefanie Camfield, assistant general counsel at Engage PEO, a human resources services firm.

The FTC estimates that its ban would boost wages and benefits by up to $488 billion over a decade.

Legal challenges may delay implementation

Employment lawyers expect there to be legal pushback from employers and business groups that may delay enforcement of the rule while it is challenged in court, and possibly prevent it from ever going into effect if those suing the FTC prevail.

Daryl Joseffer, chief counsel of the U.S. Chamber’s Litigation Center, characterized the FTC rule banning noncompetes as an “administrative power grab.” “They’re trying to regulate a century-old business practice across the entire economy,” Joseffer said.

If the rule is allowed to stand, it opens “a pandora’s box, where they can micromanage any aspect of the economy,” the Chamber’s chief policy officer, Neil Bradley, asserted.

In December of last year, New York State Governor Kathleen Hochul vetoed a bill passed by the state legislature to completely ban noncompete agreements in that state.

What employees should know now

A nationwide ban on noncompete clauses can make things easier for rank-and-file workers who want to change jobs and not fear retaliation from their former employer.

“Having a bright line saying you can’t do it at all would be a major help to employees,” said employee-side attorney Anne Clark at Vladeck, Raskin & Clark P.C.

But unless and until a nationwide ban goes into effect, any employee who has already signed a noncompete or is being asked to do so should understand the contours of it.

“Understand what you’re being asked to sign. And if you don’t, ask questions,” said Amanda Wait, a partner at the law firm DLA Piper and a former lawyer with the FTC.

You might start by checking the particulars of the law in your state governing employee agreements and what, if any prohibitions there are on employers. You might also consult with an attorney to help you interpret your noncompete, since courts may use a lot of different factors in determining whether a noncompete is unfairly restrictive, Clark said.

This story has been updated with additional information.

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