The Federal Trade Commission recently made a ruling that could potentially impact millions of American workers by banning noncompete contracts in most cases. These contracts prevent employees from leaving their current job to work for a competitor for a set amount of time. The commission believes that this move will lead to increased job creation, higher wages, and more competition among businesses. However, the decision is expected to face legal challenges from businesses that argue they need to protect trade secrets and confidential information.
Noncompete contracts currently cover about 30 million U.S. workers in a wide range of industries, including TV news producers, hairdressers, corporate executives, and computer engineers. The commission estimates that the ban on noncompetes could lead to the creation of 8,500 start-ups annually and up to $488 billion in increased wages for workers over the next decade. The rule was approved in a 3-to-2 vote, with Republican commissioners Melissa Holyoak and Andrew N. Ferguson dissenting.
The U.S. Chamber of Commerce has vowed to sue the F.T.C. to block the proposal, calling it an “unlawful power grab.” They, along with the dissenting commissioners, argue that the F.T.C. does not have the authority to address this issue and that it should be left to individual states. Employers also contend that noncompete contracts provide an incentive to invest in employees as they ensure workers will not leave for competitors.
Although the new rule is expected to become law 120 days after being published in the Federal Register, legal challenges could potentially delay or block the change. The commission clarified that noncompete contracts affecting senior executives can still remain in effect, with executives defined as employees in policy-making positions earning at least $151,164 annually. Employees bound by existing noncompetes must be notified that these agreements will no longer be enforceable.
Some states, such as California and Oregon, have already taken steps to restrict noncompete agreements on their own. In New York, a bill that would have banned noncompetes was vetoed by Governor Kathy Hochul in December. She felt the legislation should have been narrower and only applied to low-wage workers. Studies have shown that noncompetes can suppress wages as they limit the ability of workers to switch jobs for better opportunities. Economists believe that the ban on noncompete contracts could have a significant impact on the labor market by allowing workers to freely pursue higher-paying positions.
Overall, the F.T.C.’s decision to ban noncompete contracts in most cases represents a significant shift in the regulation of corporate America under the leadership of Chair Lina M. Khan. The commission has been more proactive in setting rules for businesses and has proposed new regulations to address various issues such as online privacy and hidden fees on consumer purchases. The impact of this decision on the workforce and businesses remains to be seen as legal challenges and potential consequences unfold.
