The Federal Trade Commission (FTC) has passed a new rule banning employers from requiring workers to sign noncompete agreements and blocking the enforcement of most existing clauses. The move is aimed at protecting the freedom of workers to change jobs and fostering competition by promoting new business formation. It is estimated that about 30 million workers in the U.S. are currently bound by noncompete clauses, which prevent employees from quickly finding new jobs in the same industry or starting their own related businesses. Under the new rule, existing noncompete clauses can only be enforced if they apply to senior executives, while companies are prohibited from entering new noncompete agreements of any kind.
The rule change, set to take effect 120 days after being published in the Federal Register, is expected to face legal challenges from business groups. FTC Chair Lina Khan believes that noncompete clauses keep wages low, suppress new ideas, and hinder the dynamism of the American economy. The banning of noncompete agreements is predicted to result in the creation of over 8,500 new startups per year. The U.S. Chamber of Commerce has announced plans to sue to block the new rule, claiming it to be an unlawful power grab that undermines American businesses’ competitiveness. The ban on noncompete agreements would affect all employers, who would be required to inform workers under existing noncompete clauses that these agreements will no longer be enforced, except for senior executives.
The FTC declined to comment on the Chamber of Commerce’s intention to sue the ban on noncompete agreements. The agency estimates that the rule would lead to wage increases for workers totaling between $400 billion to $488 billion over the next decade, with an average annual increase of $524 per worker. Additionally, the rule is expected to result in the creation of up to 8,500 new businesses per year and an increase in the number of patents being granted annually. This, in turn, is projected to boost competition and innovation in the business sector. However, the Chamber of Commerce views this decision as government micromanagement of business, stating that it will sue the FTC to block the rule, claiming it to be unnecessary and harmful to employers, workers, and the economy.
The ban on noncompete agreements is a significant development that could have far-reaching implications for workers and businesses in the U.S. By removing barriers that restrict job mobility and the ability of employees to start their own businesses, the FTC aims to enhance competition and creativity within the labor market. Despite the expected legal challenges from business groups, the FTC stands by its decision, emphasizing the importance of allowing workers to pursue new opportunities and bring innovative ideas to the market. The outcomes of this rule change could lead to a more dynamic and prosperous economy, with increased wages, business formation, and innovation benefiting workers and society as a whole.
