FTC bans most non-compete clauses, claiming the accounts 'robbed people of their economic liberty'

Employers will be banned from using noncompete contracts to prevent workers from joining rival firms, regulators said today.

The Federal Trade Commission (FTC) voted 3-2 to ban the measures which roughly affect one in five workers today. 

Historically non-compete measures have been associated with high-level executives at technology and financial companies but are increasingly used to target lower paid workers such as security guards and sandwich-shop employees. 

The agreements usually prohibit workers from jumping to a competing company for a prescribed period of time.

The Federal Trade Commission (FTC) voted 3-2 to ban non-compete contracts which roughly affect one in five workers today. Pictured: FTC Commissioner Lina Khan

A 2021 study by the Federal Reserve Bank of Minneapolis found that more than one in 10 workers who earn $20 or less an hour are covered by noncompete agreements. 

When it proposed the ban in January 2023, FTC officials asserted that noncompete agreements harm workers by reducing their ability to switch jobs for higher pay, a step that often provides most workers with their biggest pay increases. 

By reducing overall churn in the job market, the agency argued, the measures also disadvantage workers who aren't covered by them because fewer jobs become available as fewer people leave jobs. 

They can also hurt the economy overall by limiting the ability of other businesses to hire needed employees, the FTC said.

The agency received about 26,000 comments on the proposal, most of them in favor. 

The rule, which doesn't apply to workers at non-profits, is to take effect in four months unless it is blocked by legal challenges.

'We heard from employees who, because of noncompetes, were stuck in abusive workplaces,' said Lina Khan, chair of the FTC, said before the vote. 

Doctors have been prevented from practicing medicine after leaving practices, she added.

Business groups have criticized the measure as casting too wide a net by blocking nearly all noncompetes and have questioned the FTC's authority to take the step.

Historically non-compete measures have been associated with high-level executives at technology and financial companies but are increasingly used to target lower paid workers such as security guards and sandwich-shop employees

Two Republican appointees to the FTC, Melissa Holyoak and Andrew Ferguson, voted against the proposal. They asserted that the agency was exceeding its authority by approving such a sweeping rule.

The U.S. Chamber of Commerce has said it will sue to block the measure, a process that could prevent the rule from taking effect for months or years. 

And if former President Donald Trump wins the 2024 presidential election, his administration could withdraw the rule.

The FTC is banning noncompetes on the grounds that they constitute an 'unfair method of competition,' but the Chamber says the law doesn't authorize the agency to regulate on those grounds.

'If they were to start exercising that authority, you´re really opening a Pandora´s box,' said Neil Bradley, executive vice president at the Chamber. 'There´s literally no limitations on what people one day can decide is an unfair method of competition.'

Noncompete agreements are banned in three states, including California, and some opponents of noncompetes argue that California´s ban has been a key contributor to that state´s innovative tech economy.

John Lettieri, CEO of the Economic Innovation Group, a tech-backed think tank, argues that the ability of early innovators to leave one company and start a competitor was key to the development of the semiconductor industry.

'The birth of so many important foundational companies could not have happened, at least not in the same way or on the same timeline and definitely not in the same place, had it not been for the ability of entrepreneurs to spin out, start their own companies, or go to a better company,' Lettieri said.