FTC Bans Noncompete Clauses, Shifting Power Balance Between Workers and Employers

The FTC bans most non-compete clauses, aiming to boost worker mobility, wages, and innovation, but faces legal challenges from business groups questioning the agency's authority.

Muhammad Jawad
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FTC Bans Noncompete Clauses, Shifting Power Balance Between Workers and Employers

FTC Bans Noncompete Clauses, Shifting Power Balance Between Workers and Employers

The Federal Trade Commission (FTC) has finalized a rule that broadly prohibits the use of noncompete clauses in employment and worker contracts, with only narrow exceptions. The rule, approved by a 3-2 vote along party lines, bans almost all existing noncompete clauses and prohibits all new noncompete clauses, except for senior executives who earn at least $151,164 in total annual compensation and hold policy-making positions.

The FTC estimates that approximately 30 million American workers are subject to noncompete agreements, which prevent employees from taking jobs with their employer's competitors for a certain period. The ban aims to promote greater innovation, more business startups, and higher wages by giving workers more freedom to change jobs and potentially earn higher salaries.

Why this matters: The FTC's action represents a major legal change that could significantly shift the power balance between workers and employers in the U.S. amid ongoing remote work disputes, resignations, and layoffs. It is the first time in 50 years that the agency has mandated an 'economy-wide' change.

The rule, set to become effective 120 days after it is published in the Federal Register, is already facing significant legal challenges. The U.S. Chamber of Commerce and other business groups have filed a lawsuit in a Texas federal court, arguing that the FTC lacks the authority to implement such a broad policy. Experts say the rule may be vulnerable to court challenges, as some courts have grown skeptical of federal agencies' power to adopt sweeping rules.

The legal battles are likely to delay the implementation of the rule, which could take effect as early as August 26, 2024, and may ultimately lead to its downfall. The FTC will have to contend with conservative judges, including those appointed by former President Trump, who have shown a willingness to rein in federal agency power.

The rule defines a noncompete clause broadly, covering any terms or conditions that prohibit, penalize, or prevent a worker from seeking or accepting work with a different employer or starting a new business after their employment ends. It extends to nearly all types of workers, including employees, independent contractors, interns, and volunteers.

"The freedom to change jobs is core to economic liberty and to a competitive, thriving economy," said FTC Chair Lina M. Khan in a statement. "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."

Key Takeaways

  • FTC bans most noncompete clauses, with narrow exceptions for senior execs.
  • Rule aims to promote innovation, startups, and higher wages for workers.
  • First 'economy-wide' change by FTC in 50 years, facing legal challenges.
  • Rule may be vulnerable to court challenges from conservative judges.
  • FTC defines noncompetes broadly, covering employees, contractors, and volunteers.