New Rule from FTC Bans Noncompete Agreements
By Hannah Lejter
On Tuesday, April 23, 2024, the Federal Trade Commission (FTC) issued a new rule in a 3-2 vote which bans noncompete clauses between employees and employers. The FTC labeled noncompete agreements as an “unfair method of competition and therefore a violation of Section 5 of the FTC Act”, according to a release on their website. Noncompete agreements prevent an employee from working for a competing business or starting their own in the same field in the US after leaving their job for a certain time period. This new regulation allows employees to work for competitor companies as soon as their current employment ends. Upon the rule’s effective date, employers must inform employees under existing noncompete agreements that these will no longer be enforced.
The Biden administration, a proponent of the rule, estimates that around 30 million workers—one in five US workers—are currently bound to noncompetes. In a tweet, President Biden stated that noncompetes restrict their opportunities to find jobs in the same industry, thus harming fair competition in the labor market. These workers are employed across a wide range of industries, including but not limited to engineering, technology, retail, and hospitality. High-income, middle-income, and low-wage workers are affected. The FTC predicts that the rule will reduce healthcare costs, encourage new business development, foster innovation, and raise worker earnings. The rule’s only exceptions are for executives or employees earning over $151,164 annually who hold a “policy-making position”, which the FTC estimates to make up less than 1% of the related workforce.
The new rule is not without criticism. Less than 24 hours after the rule was issued, the US Chamber of Commerce opposed the rule by filing a lawsuit, arguing that the FTC overstepped its authority and raising Fifth Amendment concerns. (See Chamber of Commerce v. FTC, No. 6:24-CV-148 (JCB) (E.D. Tex. April 23, 2024). Ryan, a tax services firm, also challenges the rule, opining that it will hinder innovation and employer incentives to invest in worker training (See Ryan, LLC v. FTC, No. 3:24-CV-986-E (AB) (N.D. Tex. April 23, 2024).
To address violations of the rule, the FTC may be able to initiate an administrative proceeding under Section 5(b) or request a district court injunction under Section 13(b) of the FTC. It remains to be seen whether they can pursue financial compensation for violations, given that Section 19 of the FTC Act does not specify financial remedies for unfair methods of competition. Despite possible legal complications, the FTC seeks to improve competitive conditions in the labor and service markets as well as Americans’ ability to find employment.
