The Issue

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At the end of April the Federal Trade Commission announced a ban on noncompete clauses and contracts. The new rule prohibits companies from limiting an employee’s ability to work in the same field, for a rival company. Noncompete clauses have long affected how professionals could work, often damaging their earning potential.

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Under the ban, the FTC will allow companies to keep noncompete clauses for senior executives, who account for only 0.75% of the overall labor market, and are defined as employees “in policy-making positions” who make over $151,164 a year. All forms of a noncompete contract for less senior employees, however, will be entirely prohibited. If the ban goes through, the FTC will order companies to inform their nonexecutive employees currently bound by noncompetes that they will no longer be enforceable. Companies will also not be able to create any new noncompete contracts for future employees, even in senior executive positions.

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The proposal was first submitted in January 2023 and eventually received over 26,000 comments from the public – 25,000 of which were in favor of the ban. The FTC ultimately decided that noncompetes were fundamentally unfair and violated Section 5 of the FTC Act, which prohibits businesses from using unfair methods of competition. The measure was finally passed by a 3-2 vote. Certain states, like Oregon and California, have already begun to restrict noncompetes regardless of the FTC ban, while the Governor of New York recently vetoed a bill that would have banned them in her state. 

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President Biden said a ban on noncompetes is an important measure to allow workers to have the right to choose who they work for, but the U.S. Chamber of Commerce has already vowed to sue the FTC over it, stating the FTC does not have the authority to address an issue that should be left up to the states. The ban could become law within 120 days after being published in the Federal Register, but legal challenges are likely to delay or block the measure altogether. 

 

Why Is It News?

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Nearly one in five Americans, roughly 30 million workers, are bound and often exploited by a noncompete contract. Many workers are forced to stay at a certain company, for lower wages, or leave their chosen industry entirely, having to start over on training and experience. They affect everyone from TV producers and corporate executives to hairdressers and computer programmers. Nearly 20% of all workers in finance and professional services, primarily on Wall Street, are bound by noncompetes, more than almost any other profession. 

 

The FTC believes that the ban will lower health care costs and boost innovation, leaving workers with the freedom to pursue new jobs, receive better wages, start new businesses, and bring new ideas to market. FTC’s chair, Lina M. Khan estimates that the ban will lead to the creation of 8,500 start-ups every year and up to $488 billion in increased worker wages over the next 10 years. They also estimate that health care costs will decrease by $194 billion over the next decade and the market will see 17,000-29,000 more patents each year for the next 10 years. 

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Studies have proven that noncompete contracts suppress wages because switching jobs is the most effective and efficient way for workers to increase how much they make. With a ban in place, economists say the labor market will likely increase almost overnight. Human resources consultants added that while many companies are looking into noncompetes for their own employees to prevent them working for rivals, they also struggle to hire workers with the necessary skills because they are usually bound by these same contracts from other companies. 

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Supporters of the ban say that it will force companies to compete harder for talent instead of essentially forcing professionals in a new line of work after completing work for a single company. Critics, however, suggest that noncompete contracts incentivize companies to invest in their employees because they know an employee won’t leave for a competitor. Businesses also use noncompete contracts to protect trade secrets and confidential, proprietary information. 

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A number of employers, however, are already using alternatives to noncompete contracts, such as trade secret laws and non-disclosure agreements (NDA), allowing them to protect their investments and business secrets without tying workers down. Researchers estimate that 95% of workers bound by noncompetes already have NDAs, meaning the company’s proprietary information is already safe. The FTC also suggests that companies hoping to keep workers around should improve wages and working conditions instead of locking in workers with noncompetes.