FTC votes to ban noncompete agreements: What to know

The Federal Trade Commission voted 3-2 Tuesday to ban most non-compete agreements, marking a watershed moment for American workers facing an uncertain future.

These common agreements currently prohibit employees from leaving their jobs to work for a competitor or start a competing business. The new rules will prevent companies from using them in the future and will retroactively erase most existing contracts.

The agency says the new rules will give tens of millions of American workers more freedom to change jobs and seek higher wages, while promoting competition and entrepreneurship in the U.S. economy.

But major business groups are already preparing to block the new rules from taking effect. They argue that noncompete agreements are necessary to protect trade secrets and that the agency is exceeding its authority.

Here’s the most important thing to know from Tuesday’s vote:

What does the final rule say?

The final rule prohibits new noncompete agreements for all workers.

Companies would also be required to terminate existing non-compete agreements for most employees. A change from the original proposal would allow non-compete agreements covering senior executives to remain in effect.

“This could have significant implications for employers who take advantage of these provisions,” said Stephen Meisner, a partner in Crowell & Morling’s antitrust and competition group.

“These provisions are widely used and businesses should now plan for eventual compliance with the regulations when they come into force and assess any necessary changes to future employee agreements.”

Melissa McDonough, a Littler shareholder and co-chair of the company’s Unfair Competition and Trade Secrets Group, laid out options for employers who still want to protect confidential information.

“Employers concerned about FTC rules and broader legislative and regulatory efforts that limit the use of noncompete agreements may consider other options to protect confidential information and business relationships. This may include non-disclosure and non-solicitation agreements, but it is still important to ensure these agreements comply with local, state and federal laws,” McDonough said. Ta.

How many workers are affected?

The FTC estimates that approximately 30 million people, or 18% of the U.S. workforce, are subject to non-compete agreements. You can apply to any level of a company, from the minimum wage worker to his CEO.

The agency estimates that prohibiting non-competes could increase worker pay by a total of $300 billion annually and lead to the creation of more than 8,500 new businesses each year.

President-appointed FTC Chair Lina Khan said, “Non-compete clauses keep wages low, stifle new ideas, and prevent the creation of more than 8,500 startups a year if non-compete clauses were banned. “This will take away the dynamism of the American economy.” Biden.

“The FTC’s final rule prohibiting non-competes will ensure Americans have the freedom to take new jobs, start new businesses, and bring new ideas to market.”

When does it take effect?

The final rule is scheduled to go into effect 120 days after publication in the Federal Register, but litigation could extend that deadline.

“Industry associations and private companies may soon file lawsuits in federal court seeking to halt enforcement of this rule. The clock will advance 120 days to the effective date of , at which point the rule will go into effect,” Meisner said.

But the U.S. Chamber of Commerce, an influential pro-business lobby, has already vowed to sue the FTC to prevent the rule from taking effect.

Who opposes the final rule and why?

Chamber of Commerce President and CEO Suzanne Clark called the new rules “a blatant power grab that will undermine the ability of American businesses to remain competitive.”

“This decision sets a dangerous precedent for government micromanagement of business, with the potential to harm employers, workers and the economy,” Clark said. “The Chamber plans to sue the FTC to stop this unnecessary and illegal rule and to put other agencies on notice that such overreach will not go unchecked.”

The Chamber of Commerce is not the only business group to oppose the final rule.

Greg Hoff, general counsel and director of labor and employment policy at the HR Policy Institute, said that while trade groups were “encouraged” by the carve-out of existing noncompete agreements for senior executives, trade groups remain “strongly motivated” by the final rule. He said he was against it. .

“To the extent that some companies unnecessarily use unreasonably broad non-compete agreements, such use is a blanket prohibition that prevents all employers from protecting their investments in accordance with established law. It doesn’t justify it,” Hof said.

Will Congress pass legislation banning non-compete agreements?

Although Congress has not given the FTC explicit authority to prohibit non-competes, several bipartisan bills have been introduced to reform non-compete agreements.

Sen. Chris Murphy (D-Conn.), Sen. Todd Young (R-Ind.), Sen. Tim Kaine (D-Va.), and Sen. Kevin Cramer (D) The Labor Mobility Law was introduced to restrict the use of workers. Agreement. Sens. Marco Rubio (R-Fla.) and Maggie Hassan (D-H.) also introduced the Freedom to Compete Act.

“If we want our economy to continue to grow, we must protect and empower American workers,” Kaine said after the vote.

“We are pleased that the Federal Trade Commission has taken this action to ban noncompete agreements that suppress wage growth, impede job mobility, and make it difficult for companies to hire talent. It will expand job opportunities for many Americans, raise wages, foster innovation, and support our nation’s economic growth,” Kaine said.