The Federal Trade Commission (FTC) has narrowly voted to ban nearly all the employment agreements employees sign which typically prevent them from joining competing businesses or launching ones of their own, sometimes at their time of hire and other times as part of their severance with the business.

The FTC received more than 26,000 public comments in the months leading up to the vote, and FTC Chair Lina Khan referenced some of the stories she had heard from workers. The agreements are deemed to prevent millions of Americans – from minimum-wage earners to top managers – from changing jobs within their industries.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” Khan said in a statement. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.”

The rule is slated to go into effect 120 days after it is published in the Federal Register.

An overview of the rule

Here’s a high-level summary:

• The final rule bans new noncompetes with all workers, including senior executives after the effective date.

• For existing noncompetes, the final rule adopts a different approach for senior executives than for other workers.
• For senior executives, existing noncompetes can remain in force. Fewer than 1% of workers are estimated to be senior executives under the final rule, and the final rule defines the term “senior executive” to refer to workers earning more than $151,164 annually who are in a “policy-making position.”
• Existing noncompetes with workers other than senior executives are not enforceable after the effective date of the final rule. The rule requires employers to give current and past employees notice that the employer will not enforce existing non-competes.

The FTC said it was banning new noncompetes for senior executives on the grounds that the agreements stifle competition and discourage employees from creating new businesses, potentially harming consumers.

The agency’s action comes more than two years after President Biden directed the agency to “curtail the unfair use” of noncompetes, under which employees effectively sign away future work opportunities in their industry as a condition of keeping their current job. The president’s executive order urged the FTC to target such labor restrictions and others that improperly constrain employees from seeking work.

Dissents, lobbying and litigation

Employers who use noncompetes argue that they are needed to protect trade secrets or other confidential information employees they learn in the course of their employment.

But corporations concerned about protecting their intellectual assets can use other methods, such as nondisclosure and confidentiality agreements and trade secret laws, and don’t need to resort to noncompete agreements, the FTC staff determined. Still, the rule is virtually certain to be challenged in court, with the US Chamber of Commerce in the past calling it “blatantly unlawful.”

In voting against it, FTC Commissioners Melissa Holyoak and Andrew Ferguson stated that the rule is defective on statutory and constitutional grounds and is evidence of a federal agency exceeding its legal authority.

State laws

In December, New York said it was working on a regulation that would have it join four states, including California, in enacting a far-reaching noncompete ban.