BUSINESS + ECONOMY

New federal rule would bar ‘noncompete’ agreements for most employees

Apr 23, 2024, 5:00 PM

ftc building shown, a new rule would bar noncompete agreements for most...

FILE - The Federal Trade Commission (FTC) building in Washington, on Jan. 28, 2015. (AP Photo/Alex Brandon, File)

(AP Photo/Alex Brandon, File)

WASHINGTON (AP) — U.S. companies would no longer be able to bar employees from taking jobs with competitors under a rule approved by a federal agency Tuesday, though the rule is sure to be challenged in court.

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.

Related: Volatile work schedules linked to burnout and health problems

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.

When it proposed the ban in January 2023, FTC officials asserted that noncompete agreements harm workers by reducing their ability to switch jobs for higher pay, a step that often provides most workers with their biggest pay increases. By reducing overall churn in the job market, the agency argued, the measures also disadvantage workers who aren’t covered by them because fewer jobs become available as fewer people leave their positions. They can also hurt the economy overall by limiting the ability of other businesses to hire needed employees, the FTC said.

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. “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.

Business groups have criticized the measure as casting too wide a net by blocking nearly all noncompetes. They argue that highly paid executives are often able to win greater pay in return for accepting a noncompete.

“It’ll represent a sea change,” said Amanda Sonneborn, a partner at King & Spalding in Chicago who represents employers that use noncompetes. “They don’t want somebody to go to a competitor and take their customer list or take their information about their business strategy to that competitor.”

But Alexander Hertzel-Fernandez, a professor at Columbia University who is a former Biden administration Labor Department official, argued that lower-income workers don’t have the ability to negotiate over such provisions.

“When they get their job offer,” he said, “it’s really a take-it-or-leave-it-as-a-whole,” he said.

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

Related: Several small Utah cities named best in country for starting businesses

“Noncompete agreements are either upheld or dismissed under well-established state laws governing their use,” said Suzanne Clark, the chamber’s CEO. “Yet 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.”

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.

John Lettieri, CEO of the Economic Innovation Group, a tech-backed think tank, argues that the ability of early innovators to leave one company and start a competitor was key to the development of the semiconductor industry.

“The birth of so many important foundational companies could not have happened, at least not in the same way or on the same timeline and definitely not in the same place, had it not been for the ability of entrepreneurs to spin out, start their own companies, or go to a better company,” Lettieri said.

The White House has been stepping up its efforts to protect workers as the presidential campaign heats up. On Tuesday, the Labor Department issued a rule that would guarantee overtime pay for more lower-paid workers. The rule would increase the required minimum salary level to exempt an employee from overtime pay, from about $35,600 currently to nearly $43,900 effective July 1 and $58,700 by Jan. 1, 2025.

Companies will be required to pay overtime for workers below those thresholds who work more than 40 hours a week.

“This rule will restore the promise to workers that if you work more than 40 hours in a week, you should be paid more for that time,” said Acting Labor Secretary Julie Su.

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New federal rule would bar ‘noncompete’ agreements for most employees