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The Federal Trade Commission (FTC) on Tuesday approved a regulation that would ban noncompete agreements nationwide on the grounds that they unfairly limit workers’ mobility and lead to lower pay.
The FTC, which currently has a Democratic majority under President Joe Biden, voted 3-2 to approve the final noncompete rule. The agency first proposed the ban on noncompete agreements in January 2023, arguing they unfairly limit competition.
Noncompete agreements generally prohibit an employee from leaving their current company to work for a competitor and are more commonly used in more senior positions. The FTC’s new rule would ban new noncompetes for all workers, including senior executives, as an unfair competitive practice.
Existing noncompetes would be treated differently for senior executives – defined as workers in a “policy-making position” who earn over $151,164 annually – as they could remain in effect for senior executives, while noncompetes for other workers would become unenforceable following the rule’s adoption.
FTC PROPOSES RULE FOR NATIONWIDE BAN ON NONCOMPETE CLAUSES FOR WORKERS
Federal Trade Commission Chair Lina Khan first proposed the noncompete ban in January 2023. (Photo by Chip Somodevilla/Getty Images / Getty Images)
“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” FTC Chair Lina Khan said in a statement after the vote. “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.”
The FTC estimated that the ban on noncompetes will boost new business formation by 2.7% per year, leading to the creation of more than 8,500 additional new businesses each year. The regulator also estimated that it will raise the average worker’s wages by an additional $524 per year and is expected to lower health care costs by up to $194 billion over the next decade.
An estimated 30 million workers, about one in five Americans in the workforce, are subject to a noncompete agreement, the FTC noted.
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Khan and Democratic members of the FTC argue the noncompete ban will improve workers’ mobility and earning potential. (Al Drago/Bloomberg via Getty Images / Getty Images)
Business groups and Republican lawmakers have opposed the FTC’s rule, arguing that noncompetes are a critical tool for companies to protect trade secrets and that they promote competitiveness.
“Time and time again, this Administration has failed to consider Main Street’s best interests when imposing new rules and regulations,” House Small Business Committee Chairman Roger Williams, R-Texas, told FOX Business.
“This proposed rule from the FTC will stifle the innovation coming from our entrepreneurs. Without noncompete clauses, large corporations can poach talent away from trailblazing small businesses,” he added. “We wrote to Chair Khan last month regarding this issue and received a high level response but remain concerned that the FTC is not properly considering small businesses in this rule.”
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The U.S. Chamber of Commerce plans to file a lawsuit to block the FTC’s ban on noncompetes. ((PAUL J. RICHARDS/AFP via Getty Images) / Getty Images)
The FTC’s rule is expected to draw legal challenges. The U.S. Chamber of Commerce, the nation’s largest business lobbying group, has said it plans to file a lawsuit to block the FTC’s noncompete rule as early as Wednesday.
Neil Bradley, chief policy officer for the Chamber of Commerce, said on a press call Monday that the FTC lacks authority to advance regulations banning noncompetes or other conduct it deems anticompetitive.
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“There is really no aspect of the U.S. economy that they couldn’t regulate” if the rule is allowed to stand, Bradley said.
Reuters contributed to this report.
