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The US Federal Trade Commission has voted to ban non-compete agreements, targeting contracts that restrict workers’ freedom to leave for a new job with another employer.
The regulator’s commissioners voted 3-2 on Tuesday to implement the sweeping measure, first proposed in January 2023, to avoid wage suppression and protect innovation. But the move sparked immediate legal pushback.
Experts say non-compete agreements have become ubiquitous across industries as control is limited and unionization declines. According to the FTC, approximately 30 million workers are subject to such contracts, which prohibit them from working for a competitor or starting a competing business for a specified period of time or within a geographic area after they leave their jobs.
“Non-competes keep wages low, stifle new ideas and rob the American economy of its dynamism, including the more than 8,500 new startups that would emerge each year if non-competes were banned,” said Lina Khan, FTC Chair. Non-compete agreements constitute “unfair methods of competition,” she added.
The FTC estimates that the new rule will increase the average worker’s income by $524 per year. The agency received more than 26,000 public comments on the issue, a sign of its importance to workers and their employers.
But the measure also outraged industry groups who claimed it was too drastic and would increase costs while jeopardizing trade secrets.
The U.S. Chamber of Commerce announced it would sue the regulator, arguing that the agency lacked constitutional and statutory authority to issue the rule. She called it a “blatant power grab” that “sets a dangerous precedent for government micromanagement of corporations.”
The FTC declined to comment on the board’s move.
Andrew Ferguson, one of two Republican FTC commissioners who voted against the rule, agreed with the argument that the agency lacked congressional authority to adopt the rule.
The expected lawsuit will intensify the legal battle between American companies and regulators appointed by President Joe Biden, who have initiated a tougher stance on setting and enforcing regulations.
Khan is among a new generation of progressive officials who have introduced tougher antitrust policies to combat what they say is unchecked anti-competitive behavior.
Some lawyers said the upcoming litigation would also increase uncertainty for businesses.
“The question is: What should companies do now?” said Russell Beck, a lawyer who served on a task force during the Obama administration that addressed the non-compete issue.
He said the best course of action for companies is to wait and see how the matter develops in court. “I think there will be a number of challenges before a judge issues a nationwide injunction prohibiting the application of the rule.”
But Rachel Dempsey, an attorney at Towards Justice, a nonprofit law firm that represents workers, said in a statement that non-competes “trap workers in jobs with low wages and poor working conditions.”
The regulation is “a historic step to protect employees from abuse by employers and empower them to stand up for their fundamental rights in the workplace,” she added.