FTC Bans Noncompete Contracts in US, Faces Potential Legal Challenges

The FTC has issued a rule banning non-compete agreements for most US workers, a move expected to face legal challenges from pro-business groups. The rule aims to boost wages and new business formation.

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Rizwan Shah
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FTC Bans Noncompete Contracts in US, Faces Potential Legal Challenges

FTC Bans Noncompete Contracts in US, Faces Potential Legal Challenges

The Federal Trade Commission (FTC) has issued a final rule banning noncompete contracts for most workers in the United States, a move that is expected to face legal challenges from pro-business groups. The rule, which passed in a 3-2 vote on April 23, 2024, will prohibit employers from entering into or enforcing noncompete agreements with their employees, with limited exceptions for senior executives earning more than $151,164 annually.

Under the new rule, companies will be required to rescind existing noncompete clauses and actively inform workers that they are no longer in effect. The FTC estimates that this ban could boost wages by nearly $300 billion per year and lead to an increase in new business formation. "The FTC's new rule will ensure that workers have the freedom to seek higher wages and better working conditions without fear of being sued by their former employers," said FTC Chair Lina Khan in a statement.

Why this matters: The FTC's ban on noncompete agreements is a significant shift in U.S. labor policy that could have far-reaching implications for workers and businesses alike. The move is likely to face legal challenges from business groups who argue that noncompetes are necessary to protect trade secrets and investments in employee training.

However, the rule has already drawn strong opposition from business groups, including the U.S. Chamber of Commerce, which has vowed to file a lawsuit challenging the FTC's authority to implement such a sweeping change. "The FTC's noncompete rule is blatantly unlawful and represents a radical departure from hundreds of years of legal precedent," said Sean Heather, Senior Vice President for International Regulatory Affairs and Antitrust at the U.S. Chamber of Commerce.

The rule is set to take effect 120 days after publication in the Federal Register, but the expected legal challenges could delay its implementation. The FTC's two dissenting commissioners, Christine Wilson and Noah Phillips, argued that the rule exceeds the agency's statutory authority and raises questions about its constitutionality under the "major questions" doctrine recently invoked by the Supreme Court.

Despite the potential legal hurdles, labor advocates and some lawmakers have praised the FTC's action as a necessary step to promote competition and protect workers' rights. The rule has also drawn support from the Biden administration, which has made promoting competition and worker mobility a key priority. The FTC's ban on noncompetes is part of a broader push by the agency to crack down on anti-competitive practices in the labor market, including wage-fixing and no-poach agreements among employers.

Key Takeaways

  • FTC bans noncompete contracts for most US workers, with limited exceptions.
  • Rule requires companies to rescind existing noncompete clauses and notify workers.
  • FTC estimates ban could boost wages by $300B/year and increase new business.
  • Rule faces legal challenges from business groups arguing FTC lacks authority.
  • FTC action part of broader push to crack down on anti-competitive labor practices.