4-27-2024 8:03am

FTC Bans Non-Compete Clauses Freeing 30 Million Workers

Chris Edwards Editor

About one in five American workers—approximately 30 million people—are bound by a non-compete clause and are thus restricted from pursuing better employment opportunities.

A non-compete clause is a contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends. Because non-compete clauses prevent workers from leaving jobs and decrease competition for workers, they lower wages for both workers who are subject to them as well as workers who are not.

The Biden administration has taken aim at noncompete measures, which are commonly associated with high-level executives at technology and financial companies but in recent years have also ensnared lower-paid workers, such as security guards and sandwich-shop employees

A 2021 study by the Federal Reserve Bank of Minneapolis found that more than one in 10 workers who earn $20 or less an hour are covered by noncompete agreements.
Non-compete clauses also prevent new businesses from forming, stifling entrepreneurship, and prevent novel innovation which would otherwise occur when workers are able to broadly share their ideas.

The Federal Trade Commission proposed preventing employers from entering into non-compete clauses with workers and requiring employers to rescind existing non-compete clauses. The Commission estimates that the proposed rule would increase American workers’ earnings between $250 billion and $296 billion per year.

The Federal Trade Commission voted Tuesday 3-2 to ban measures known as noncompete agreements, which bar workers from jumping to or starting competing companies for a prescribed period of time. According to the FTC, 30 million people — roughly one in five workers — are now subject to such restrictions.

The rule, which doesn’t apply to workers at non-profits, is to take effect in four months unless it is blocked by legal challenges.

“Noncompete clauses keep wages low, suppress new ideas and rob the American economy of dynamism,” FTC Chair Lina Khan said as reported by the AP. “We heard from employees who, because of noncompetes, were stuck in abusive workplaces.” Some doctors, she added, have been prevented from practicing medicine after leaving practices.

The U.S. Chamber of Commerce said that it will file a lawsuit to block the rule. It accused the FTC of overstepping its authority.

“Noncompete agreements are either upheld or dismissed under well-established state laws governing their use,” said Suzanne Clark, the chamber’s CEO. “Yet, three unelected commissioners have unilaterally decided they have the authority to declare what’s a legitimate business decision and what’s not by moving to ban noncompete agreements in all sectors of the economy.”

Two Republican appointees to the FTC, Melissa Holyoak and Andrew Ferguson, voted against the proposal. They asserted that the agency was exceeding its authority by approving such a sweeping rule.

Noncompete agreements are banned in three states, including California, and some opponents of noncompetes argue that California’s ban has been a key contributor to that state’s innovative tech economy.