Federal Trade Commission issues new rule banning non-compete agreements
In a controversial move, the Federal Trade Commission (FTC) recently issued a final rule banning the use of non-compete agreements. These agreements, once reserved for top executives and those with access to sensitive company information, have increasingly found their way into the contracts of low-wage workers, stifling mobility and wages, and limiting economic opportunities. With this new rule, the FTC claims it will shift the balance of bargaining power back to workers and foster a more competitive and equitable labor market.
The FTC’s Rationale
Non-compete agreements have long been criticized for their detrimental effects on workers. Originally intended to protect a company’s trade secrets and proprietary information, these agreements have morphed into tools of coercion, restricting workers from seeking employment in similar industries even after leaving their current job. For many, especially those in low-wage and entry-level positions, non-compete agreements have served as barriers to career advancement, trapping them in low-paying jobs with little opportunity for upward mobility.
The FTC’s new rule signals a departure from the status quo, arguing that non-competes have a harmful impact on workers and the economy as a whole. One of the primary arguments against non-compete agreements is that they are anticompetitive. By preventing workers from seeking employment with competitors, these agreements artificially limit competition in the labor market, allowing employers to maintain control over wages and working conditions without fear of losing talent to rival companies. This lack of competition, the FTC alleges, not only suppresses wages but also stifles innovation and hampers economic growth. A noteworthy exception is California, which has long prohibited non-competes, and saw its tech industry in particular flourish over recent decades.
The FTC also argues that non-compete agreements disproportionately affect vulnerable workers, including low-wage workers, immigrants, and individuals in industries with high turnover rates. For these workers, the ability to freely move between jobs is essential for economic survival and career advancement.
Opposition to the New Rule
Critics of the FTC’s new rule argue that non-compete agreements are necessary to protect legitimate business interests, such as confidential information and client relationships. While it is true that businesses have a legitimate need to safeguard sensitive information, there are alternative means of achieving this goal without resorting to overly broad and restrictive non-compete agreements. For example, companies can use confidentiality agreements, non-disclosure agreements, and non-solicitation agreements to protect their interests without unduly limiting workers’ employment options.
What the Rule Does; Alternative Options for Employers
Furthermore, the FTC’s rule includes provisions to address legitimate business concerns, such as allowing companies to enforce non-compete agreements in cases of trade secret theft or when an employee receives significant compensation in exchange for agreeing to the restriction. The FTC is attempting to strike a balance between protecting workers’ rights and safeguarding legitimate business interests, although various business interests, such as the U.S. Chamber of Commerce, have already filed suit to block the rule, arguing that the agency lacks statutory authority to make and enforce such a rule. If no court blocks the rule, it will take effect 120 days after being published in the Federal Register, which is expected soon. Employers are required under the rule to notify workers held to an existing non-compete agreement that it will not be enforced against them in the future. The new rule does not ban the use of non-competes in connection with the sale of a person’s equity ownership in a business entity or the sale of a business’ assets. It also does not prohibit enforcement of existing non-competes with “senior executives”, defined as high-level “policymaking” employees earning total compensation of at least $151,164 in the preceding year.
Colorado changed its non-compete law in 2022 to impose severe restrictions on their use, but the FTC rule of course goes much further. While the ultimate fate of the new rule may lie with the courts, employers should consider using other methods to protect their business interests, including confidentiality, non-solicitation, and related agreements.