A federal agency voted Tuesday to ban non-compete agreements that are used by employers in a range of industries across the country to restrict employees on where and when they can take a new job within their same field.
The Federal Trade Commission proposed the rule in January 2023, and received over 26,000 public comments, which a lawyer for the agency said was overwhelmingly in support of a ban. The FTC voted 3-2 at a Tuesday hearing to prohibit new non-competes, a rule that will go into effect in 120 days though it faces legal challenges that could change the timing.
When it comes to existing contracts, non-competes will be unenforceable, though they will be allowed to remain in place for senior executives. Employers will be required to give notice to workers that they are no longer enforcing the agreement. The rule could allow an estimated 30 million Americans who have non-competes to be able to find new jobs.
While the rule is scheduled to go into effect in four months, critics like pro-business group the U.S. Chamber of Commerce are filing a lawsuit to block the final rule, which could potentially put the ban on ice.
Supporters of the ban argue non-compete clauses stifle competition in the workforce and keep wages low for workers who have little to no leverage to negotiate or leave for a higher salary. While they have been used to protect highly sensitive information, their use has expanded to fast-food workers, hairdressers, house cleaners, staff at law offices and other places that largely employ low-wage workers.
These contracts greatly vary by company and industry. They can prevent an employee from working for a competitor for a specified window of time that can span weeks to months to years. Some expire during a worker’s tenure, but many can last regardless of the length of employment, even if that worker is laid off by the company.
FTC attorney Benjamin Cady said the final rule is expected to increase wages by more than $400 billion over 10 years, or an average of $524 per worker each year. Cady also estimated that it could create more than 8,500 new businesses a year and an average increase of 17,000 to 29,000 patents a year over the next decade.
Comments from the public about non-competes “really point to the basic reality of how robbing people of their economic liberty also robs them of all sorts of our freedoms: chilling people’s speech, infringing on their religious practice and impeding people’s right to organize,” FTC Chair Lina Khan said at Tuesday’s hearing.
In addition to Khan, FTC commissioners Rebecca Slaughter and Alvaro Bedoya voted for the final rule. During the hearing, Bedoya said he was initially skeptical about the agency’s authority but after reading case law from the second highest court in the U.S., he “went from being a skeptic to a strong supporter.”
Some backers of non-competes acknowledge that they are not always appropriate in every situation or industry, but argue that these agreements are important especially for workers who are privy to high-level information or trade secrets that can hinder their company if they depart for a competitor.
“This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy,” U.S. Chamber of Commerce president and CEO Suzanne P. Clark said in a statement. “The Chamber will sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked.”
FTC commissioners Melissa Holyoak and Andrew Ferguson voted against the final rule, arguing that the federal agency does not have the authority to ban non-competes and circumvent Congress.
“No matter how important, conspicuous and controversial the issue, and no matter how wise the administrative solution, an administrative agency’s power to regulate must always be grounded in a valid grant of authority from Congress,” Ferguson said at the hearing. “Because we lacked that authority, the final rule is unlawful.”
Because of the expected legal challenges, proponents at the federal and state level are pushing for legislation that places significant limits on these types of contracts.
U.S. Sen. Chris Murphy, D-Conn., has reintroduced his bipartisan legislation with Sen. Todd Young, R-Ind. — the Workforce Mobility Act of 2023 — that would limit the use of non-competes with exceptions to those involved in the sale of businesses or the end of partnership agreements.
Murphy commended the FTC’s rule, urging Congress to take up his legislation on this issue.
“Non-compete agreements are terrible for workers and our economy — they suppress wages, stifle innovation, and undermine competition,” Murphy said. “Today’s action by the FTC puts power back into the hands of workers and budding entrepreneurs. Congress should pass our bipartisan legislation to ensure employers can never again use non-competes to protect their own interests at the expense of fair wages and economic growth.”
And in Connecticut, the General Assembly is once again considering legislation placing more limits on these agreements. In February, the Labor and Public Employees Committee heard testimony on a bill to ban non-competes from employment contracts.
House Bill 5269 would ban non-competes for anyone earning less than three times the minimum wage and independent contractors earning less than five times the minimum wage. For those outside of those parameters, it would require employers to give the contracts to prospective employees earlier in the hiring process.
Supporters of the bill, like labor lawyers and the president of the Connecticut AFL-CIO, testified that non-competes suppress income, especially for low-wage workers, as well as hurt innovation.
The Insurance Association of Connecticut and the Connecticut Business and Industry Association spoke in opposition, taking issue with using the minimum wage as an index and expressing concern about protections for businesses, especially those in the manufacturing sector.
The bill was reported favorably out of the Joint Committee on Labor and Public Employees and is now scheduled to go before the Judiciary Committee.
State lawmakers considered similar legislation during the last legislative session, but it did not get a vote in the House. It is unclear, however, what traction the issue will get this time at the state or federal level.
Compared to neighboring states, Connecticut lacks statutes and regulations governing how non-compete agreements function within the state, with the exception of a few industries.
These contracts are left up to the courts and case law, though employment lawyers who work with clients involved in non-competes say they are rarely litigated and that many do not have the resources to take it to court. Judges in Connecticut must determine if a contract is “reasonable” and therefore enforceable based on the duration, geographic scope, fairness of the employer’s protection and ”the restraint on the employee’s ability to pursue the employee’s occupation.”
But there are some carveouts in for security guards and broadcasters. For physicians, a non-compete can be upheld if it is needed to protect “legitimate business interest” and “reasonably limited in time, geographic scope and practice restrictions.”
A physician non-compete agreement signed or renewed on or after July 1, 2016 can only be enforceable for up to one year and within a geographic radius of 15 miles from the employee’s job.
The Connecticut Mirror/Connecticut Public Radio federal policy reporter position is made possible, in part, by funding from the Robert and Margaret Patricelli Family Foundation and Robert Jaeger.
This story was originally published by the Connecticut Mirror.
