The Federal Trade Commission on Tuesday voted 3-2 in favor of adopting a historic and far-reaching ban on noncompete agreements, potentially giving more leverage in the job market to millions of U.S. workers.
The agency has said that the agreements, in which workers are forbidden from seeking a job with a competing business for a certain period of time, lead to an “unfair method of competition” and violate federal law. The vote by the agency’s five commissioners this week means the ban will move forward.
The FTC’s three Democratic members were in favor of adopting the regulation, while its two Republican members were against it.
Noncompetes have been under fire for years because of the way they can lock workers into jobs and suppress wages by reducing mobility in the labor market. And they are not strictly the domain of well-compensated executives and engineers; these days, even fast-food workers can find themselves barred from taking a job at a competing business.
“The FTC estimated that the ban would boost wages by between $400 billion and $488 billion over 10 years.”
Lina Khan, the commission’s chair and a progressive appointee of President Joe Biden, has said that the contracts undermine the “core” of economic liberty.
“Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand,” Khan said when proposing the ban in early 2023.
The agency estimated that the ban would boost wages by between $400 billion and $488 billion over 10 years, and lead to the creation of more than 8,500 new businesses per year.
Business groups are expected to challenge the legality of the ban, perhaps by arguing that the commission is stepping outside its authority in issuing it, and could seek to have a judge block it from taking effect. Employers often argue that noncompetes are necessary to protect the investments they’ve made in training workers.
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The U.S. Chamber of Commerce called the ban “blatantly unlawful,” and its president publicly vowed to fight it in court “if necessary.”
A handful of states have already outlawed noncompete agreements, while others have limited their scope. Some have sanctioned the agreements for high earners but restricted them for workers earning less than a certain amount. The FTC’s rule does not include a salary threshold, but it has an exception for noncompetes when a business is sold.
The final rule also allows existing non-competes to be enforced for senior executives. But all other such contracts would be rendered unenforceable when the rule is implemented, FTC attorney Ben Cady explained during the hearing.
Cady, who helped develop the rule, said the agency received more than 26,000 public comments on the proposal, with 25,000 of them supportive of the ban. The experiences people shared ― being stuck in crummy jobs, fearing litigation if they tried to leave ― provided “strong qualitative evidence” backing up the agency’s research, Cady added.
When proposing the rule, the FTC noted that noncompetes could hurt low-wage workers in particular, citing use of the contracts at the sandwich chain Jimmy John’s, which HuffPost had revealed in 2014.
The Jimmy John’s noncompete barred workers from taking a job at a competing business within two years of leaving. It defined a competitor as any business that is located within 3 miles of a Jimmy John’s and derives at least 10% of its revenue from “submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches.”
Biden had urged the FTC to take action against noncompete agreements not long after taking office, signing an executive order in July of 2021.
“These aren’t just high-paid executives or scientists who hold secret formulas for Coca-Cola so Pepsi can’t get their hands on it,” Biden said then. “They’re construction workers, hotel workers, disproportionately women and women of color.”