The Federal Trade Commission (FTC) has banned almost all noncompete employment agreements that prohibit workers from switching to competing businesses or starting one of their own.
The ban narrowly passed three to two in a Tuesday vote after the commission received more than 26,000 public comments, some that were referenced by chair Lina Khan.
“We heard from employees who, because of noncompetes, were stuck in abusive workplaces,” she said, according to NPR. “One person noted when an employer merged with an organization whose religious principles conflicted with their own, a noncompete kept the worker locked in place and unable to freely switch to a job that didn’t conflict with their religious practices.”
The FTC’s new rule, which will go into effect 120 days after publication in the Federal Register, calls noncompete contracts an “unfair method of competition.”
Khan argued that those experiences shared by the public “pointed to the basic reality of how robbing people of their economic liberty also robs them of all sorts of other freedoms.”
The commission claimed that over 25,000 messages from the public that came in during the 90-day public comment window beginning in January 2023 were “in support of the FTC’s proposed ban on noncompetes.”
Around 30 million people — 20 percent of U.S. workers — are bound by noncompetes, officials estimated. The FTC said the new policy could create a total wage increase of nearly $300 billion per year by allowing people more work freedom.
“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,” Khan said in a statement. “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.”
In addition to growing thousands of new businesses, the FTC estimates that the average worker’s earnings will increase by an additional $524 per year.
The agency also stated that their decision is expected to lower health care costs by up to $194 billion and lead to an estimated average increase of 17,000 to 29,000 patents each year over the next decade.
The FTC has also allowed an exception to the rule for existing noncompetes between companies and their senior executives, who represent less than 0.75 percent of workers.
“But employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives,” the agency stated. “Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompetes against them.”
Melissa Holyoak and Andrew Ferguson, the only dissenters and only Republicans on the commission, argued the FTC was going outside its boundaries of power in the decision, NPR reported.
Holyoak predicted that the rule would be challenged in court — a prediction that came true shortly after the vote.
Business groups led by the U.S. Chamber of Commerce sued the FTC in a Texas federal court on Wednesday, arguing that the commission doesn’t have the power to issue such a rule.
The group has been vocally oppositional to the proposed ban for over a year, saying that noncompetes are necessary for some businesses in order for them to guard trade secrets. They have also argued that noncompetes help workers in giving their employers a greater incentive to invest in workforce training and development, Bloomberg reported.
“This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy,” wrote Suzanne P. Clark, president and CEO of the U.S. Chamber, in a statement.
Meanwhile, Rep. Matt Gaetz (R-FL) applauded the FTC’s decision as a “vindication of economic freedom and free enterprise.”
“Under Sections 5 and 6 of the FTC Act of 1914, the FTC is empowered to regulate to prohibit ‘[u]nfair methods of competition…and unfair or deceptive acts or practices in or affecting commerce,'” the congressman wrote on X.
“This law, in effect for over a century, reflects that our Constitution contemplates limiting all power concentrations in the country, whether public or private,” Gaetz continued. “As housing costs continue to go up, and wages continue to remain stagnant under President Biden, the last thing we need are corporations limiting the ability of free Americans to engage in side hustles or change jobs.”
“The @FTC’s rule is a win for American workers and consumers.”
Rep. Thomas Massie (R-KY) argued that “employment contracts such as these have been and should be regulated by the states,” not by “bureaucratic rule.”
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