The Federal Trade Commission (FTC) just dropped a bombshell: they’re putting the kibosh on non-compete agreements. Yes, you heard that right – those contracts have been the bane of many employees’ existence, restricting them from hopping over to greener pastures with a rival company. It’s a move that’s bound to send shockwaves through boardrooms and watercooler conversations alike. And if the immediate legal challenge is any indication, we’re in for a showdown of epic proportions.
The FTC Chair, Lina Khan, and her fellow Democratic commissioners have effectively invalidated tens of millions of employment contracts without authority from Congress. In a sweeping 570-page decree, the FTC has slammed the gavel down on non-compete agreements, effectively banning them across all sectors of the economy. Labor organizations and policy experts with left-leaning ideologies praised the new regulation.
Without non-compete agreements, Big Tech giants in California gain the upper hand in luring talent away from startups with enticing offers of better compensation packages and stock options. Khan’s directive is poised to disproportionately benefit well-funded corporations at the expense of smaller enterprises. While the FTC suggests that companies resort to legal recourse, such as lawsuits, to safeguard trade secrets, this overlooks the inherent challenge of effectively protecting proprietary knowledge held by employees. Not to mention that lawsuits are costly, especially for small corporations.
Non-competes were designed to safeguard employers’ intellectual property and investment in employee development; the FTC argues that these agreements “constrict the liberties of American workers and keep wages suppressed” while also stifling the emergence of fresh businesses and innovative concepts. Despite a plethora of counterarguments, the agency is now blocking employers from enforcing existing non-compete agreements for non-” senior executive” personnel.
Business groups have expressed their opposition to the ban on non-compete agreements. They believe these agreements are necessary to safeguard trade secrets and proprietary information. Moreover, they argue that non-competes promote a collaborative work environment and prevent the emergence of “free riders,” i.e., employees who take advantage of a company’s methods and then move on to another firm.
The U.S. Chamber of Commerce, known as the biggest business lobby group in the United States, has announced its plan to sue the Federal Trade Commission following a recent ruling. Its current CEO, Suzanne Clark, has criticized the new rule, saying that it is illegal and could harm both businesses and employees. “The Federal Trade Commission’s decision to ban employer non-compete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive,” she stated. Clark added that this sets a troubling precedent for excessive government interference in private business affairs, potentially harming employers, employees, and the broader economy.
Clark announced that the U.S. Chamber of Commerce would be promptly challenging the rule in court. She argued that the FTC, despite its century-long history, lacks the constitutional and statutory authority to unilaterally impose such competition regulations. Clark said that traditionally, non-compete agreements have been regulated by state laws. Adding that today’s decision by three unelected officials to outlaw these agreements across all sectors is an overstep of their powers.
Federal authorities, however, argue that the ban on non-compete agreements will benefit employees and curb employers’ exploitative practices. According to the FTC, eliminating these contracts is expected to increase worker wages and decrease healthcare costs by as much as $194 billion over the next ten years. It is also anticipated to foster innovation, which will be evidenced by an increase in patents.
Khan highlighted the positive impacts of removing such clauses. “Non-compete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned,” Khan stated. She added that the final rule aims to empower Americans to seek new employment opportunities, start businesses, or market new innovations without restrictions.
According to the FTC, around 30 million U.S. workers, or roughly 20% of the workforce, are bound by non-compete contracts. Under the new FTC rule, most existing non-compete agreements will become unenforceable from the rule’s effective date. However, the rule will still permit existing contracts for senior executives, who comprise less than 0.75% of the workforce, to remain in effect. The rule also prohibits creating or enforcing any new non-competes, including those involving senior executives.
Additionally, the FTC mandates that employers notify all employees currently subject to non-competes that these agreements will no longer be enforced.
