Federal authorities voted Tuesday to ban noncompete agreements, which are often used by employers to prevent workers from jumping to competitors.
Leaders at the Federal Trade Commission voted 3-2 in favor of the new rule, which is set to officially take effect in 120 days. However, the ban is expected to face intense legal challenges that will likely stall implementation.
The FTC first proposed the new rule in January 2023. The agency received 26,000 public comments in the ensuing 16 months, and around 25,000 were in favor of the rule, according to FTC Chair Lina Khan.
“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism,” Khan said in a statement. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business or bring a new idea to market.”
Business groups have promised to challenge the rule in court. The U.S. Chamber of Commerce — a lobbying group, not a government body — slammed Tuesday’s vote.
“Today, 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,” the group’s president, Suzanne Clark, said in a statement.
The FTC estimates that about 18% of all U.S. employees — about 30 million people — are under noncompete agreements. Such paperwork was initially common for top executives in technology and financial companies, but in recent years noncompetes have filtered down to lower paid workers as well.
As of 2021, 12% of workers making $20 per hour or less were covered by noncompete agreements, according to a study conducted by the Federal Reserve Bank of Minneapolis.
The FTC said it targeted noncompetes because they depress wages, preventing people from switching companies for more money, while also stifling innovation by stopping employees from leaving to start their own companies.
Business leaders have argued that noncompetes are necessary to stop people from stealing trade secrets and leveraging proprietary information.
The New York State Legislature passed a statewide ban on noncompetes in 2023, but Gov. Hochul vetoed it in December. Hochul, a Democrat, was reportedly trying to negotiate a compromise, but the deal fell apart.
Three states, California, North Dakota and Oklahoma, have outlawed all noncompetes for decades. More recently, 11 states and Washington, D.C. have passed laws to ban noncompetes for people who make less than a certain yearly salary.
Negotiations over the New York bill reportedly centered on a $250,000 ceiling.
With News Wire Services
