By Daniel Wiessner
(Reuters) -The U.S. Federal Trade Commission on Tuesday approved a rule to ban agreements commonly signed by workers not to join their employers’ rivals or start competing businesses, which it says restrict workers’ mobility and suppress wages.
The five-member FTC, which enforces antitrust laws and currently has a Democratic majority under President Joe Biden, voted 3-2 at a public meeting to approve the rule.
The rule, first proposed in January 2023, will take effect in August.
Democrats, the commission and worker advocates who support the rule say it’s necessary to curb the increasingly common practice of requiring workers to sign so-called “non-compete agreements,” even in lower-paying service industries such as fast food and retail.
The FTC said Tuesday that banning non-competes will increase worker earnings by up to $488 billion over the next decade and lead to the creation of more than 8,500 new businesses per year.
FTC Chair Lina Khan said at the meeting that non-compete agreements not only limit workers’ opportunities but can also violate other fundamental rights by preventing them from changing jobs.
“Depriving people of their economic freedom also deprives them of all kinds of other freedoms, chilling speech, infringing on their religious practice and hindering people’s right to organize,” Khan said.
But the agency’s two Republican commissioners, Melissa Holyoak and Andrew Ferguson, said federal law does not allow the commission to adopt broad rules banning conduct it considers anticompetitive.
“We are not a legislature,” Ferguson said. “I don’t believe we have the power to void tens of millions of existing contracts.”
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LEGAL CHALLENGES
Major business groups representing a range of industries have criticized the rule, saying non-compete agreements are a crucial way for companies to protect trade secrets and that they promote competitiveness.
Shortly after the vote, tax preparer Ryan LLC filed a lawsuit in Texas federal court, challenging the non-compete ban and claiming the agreements could benefit businesses, workers and the economy.
The U.S. Chamber of Commerce, the nation’s largest business lobby, said in a statement that it would also legally challenge the rule.
“This decision sets a dangerous precedent for government micromanagement of business and could harm employers, workers and our economy,” said Chamber President and CEO Suzanne Clark.
The rule would require companies with existing non-compete agreements to drop them and inform current and former employees that they will not be enforced. Daryl Joseffer, chief counsel in the chamber’s litigation division, said on the call Monday that the retroactive nature of the rule also makes it invalid.
Unions have supported the FTC’s vote in favor of the ban.
“Non-compete agreements prevent workers from finding better jobs, drive down wages, and stifle competition,” the AFL-CIO, the nation’s largest labor federation, said in a tweet in response to the announcement.
“We commend the FTC and (Lina Khan) for finalizing a strong rule to ban these exploitative practices and level the playing field for American workers,” it added.
Left-wing advocacy groups also praised the change, calling it a major victory for workers that will strengthen the national economy by boosting entrepreneurship. “The FTC has abolished a modern form of involuntary servitude,” said Sandeep Vaheesan, legal director of the Open Markets Institute, a think tank that focuses on antitrust issues.
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“Big business lobbyists are already promising to sue the FTC to prevent the non-compete ban from going into effect,” Bharat Ramamurti, the former deputy director of the Biden White House National Economic Council, wrote on Twitter in response to the lawsuits. “They like non-compete agreements as a way to keep workers under their thumb and suppress wages.”
The rule does not exempt specific jobs or industries, but it does not apply to existing agreements signed by senior managers. The FTC does not regulate certain industries, including nonprofits, some banks and insurance companies, and airlines.
California, Minnesota, Oklahoma and North Dakota have banned non-compete agreements, and at least a dozen other states have passed laws restricting their use.
New York Governor Kathy Hochul, a Democrat, vetoed a bill in December that would have banned virtually all non-compete agreements in the state. Hochul said she would consider signing a bill that would exempt higher-income workers and executives.
