FTC Votes to Ban Non-Compete Agreements: What to Know

The Federal Trade Commission voted 3-2 on Tuesday to ban most non-compete agreements, a watershed moment for a U.S. workforce facing an uncertain future.

Currently, these common agreements prevent employees from leaving to work for competitors or starting a competing business. The new rule prevents companies from using them in the future and retroactively eliminates most existing agreements.

The agency says the new rule will give tens of millions of American workers more freedom to change jobs and seek higher wages, as well as promote competition and entrepreneurship in the U.S. economy.

But large business groups are already preparing to prevent the new rule from coming into force. They say non-compete agreements are necessary to protect trade secrets and that the agency overstepped its authority.

Here are the most important things to know about Tuesday’s vote.

What does the final rule say?

The final rule would ban new non-compete agreements for all workers.

Companies will also have to scrap existing non-compete agreements for most employees. Unlike the original proposal, non-compete agreements covering senior executives may remain in effect.

“This could have a profound impact on employers who use these clauses,” said Stefan Meisner, partner in the antitrust and competition group at Crowell & Moring.

“These clauses are widely used and companies must now plan for eventual compliance with the rule when it comes into force and assess any necessary changes to their employment arrangements going forward.”

Melissa McDonagh, Littler shareholder and co-chair of the company’s unfair competition and trade secrets practice group, laid out the options for employers who still want to protect their proprietary information.

“Employers concerned about the FTC rule and broader legislative and regulatory efforts to restrict the use of non-compete agreements may seek other options to protect their confidential information and business relationships. This could include non-disclosure and non-solicitation agreements, although it is still important to ensure that these agreements comply with local, state and federal laws,” McDonagh said.

How many workers are covered?

About 18% of the U.S. workforce is covered by non-compete agreements, approximately 30 million people, according to FTC estimates. They can apply to all levels of the company, from minimum wage workers to CEOs.

The agency estimates that banning non-competing companies could increase worker wages by $300 billion per year and lead to the creation of more than 8,500 new companies per year.

“Non-compete clauses keep wages low, suppress new ideas, and steal momentum from the American economy, including the more than 8,500 new startups that would be created each year once non-competes are banned,” said the FTC chairwoman. , Lina Khan, who was appointed by the president. Biden.

“The FTC’s final rule to ban non-competes will ensure that Americans have the freedom to look for a new job, start a new business or bring a new idea to market.”

When will it come into force?

The final rule is scheduled to take effect 120 days after it is published in the Federal Register, although a lawsuit could extend that deadline.

“It is possible that a commercial association or individual company could file a lawsuit in Federal Court seeking to prevent the application of the rule in the short term. Until a court issues some type of immediate relief from such legal action, the 120-day clock will advance to the effective date of the rule, at which time the rule will take effect,” Meisner said.

But the U.S. Chamber of Commerce, the influential pro-business lobbying group, has already vowed to sue the FTC to stop the rule from taking effect.

Who opposes the final rule and why?

Chamber President and CEO Suzanne Clark called the new rule “a blatant power grab that will harm the ability of American businesses to remain competitive.”

“This decision sets a dangerous precedent for government business micromanagement and could harm employers, workers and our economy,” Clark said. “The House will sue the FTC to block this unnecessary and illegal rule and warn other agencies that such overreach will not go unnoticed.”

The Chamber is not the only business group that opposes the final rule.

Greg Hoff, associate attorney and director of labor and employment policy at the HR Policy Association, said that while they were “encouraged” by the exclusion of existing non-compete agreements for senior executives, the trade association still “strongly opposes” the rule. Final .

“To the extent that some companies unnecessarily use overly broad non-compete agreements, such use does not justify a blanket prohibition that inhibits all employers from protecting investments in accordance with well-established law,” Hoff said.

Will Congress pass a bill to ban non-compete agreements?

Congress has not given the FTC explicit authority to ban non-competes, although several bipartisan bills have been introduced to reform non-compete agreements.

Senators Chris Murphy (D-Conn.), Todd Young (R-Ind.), Tim Kaine (D-Va.), and Kevin Kramer (RN.D.) introduced the Workforce Mobility Act, which limits the use of non-compete agreements. Senators Marco Rubio (R-Florida) and Maggie Hassan (D-N.H.) also introduced the Freedom to Competition Act.

“If we want to continue to grow our economy, we must protect and empower American workers,” Kaine said after the vote.

“I am pleased that the Federal Trade Commission is taking this action to prohibit non-compete agreements, which stifle wage growth, hamper job mobility and make it harder for companies to hire talent. This will expand employment opportunities for more Americans, increase wages, promote innovation and support our country’s economic growth,” said Kaine.