The Biden administration on Tuesday finalized a rule making it easier for workers to leave their jobs for better ones, in a move intended to boost competition and raise workers’ pay.
The Federal Trade Commission barred so-called noncompete agreements, under which employees agree not to work for certain other businesses after leaving a current employer. The agreements, which are often presented as a condition of taking a job, now cover an estimated one in five workers, according to the FTC; critics say they have been shown to suppress workers’ pay and make it harder to start their own businesses.
“In parts of the economy that turn on human relations—sales businesses, advisory businesses, client-services businesses—this would be a huge sea change,” said John Siegal, a partner at BakerHostetler who represents financial, real estate, and media clients.
“It’s going to be a very, very big shift if this rule goes in effect.”
Read more: The FTC non-compete ruling will narrow the gender gap in entrepreneurship
That’s a big if, as business interests have vowed to take it to court. The U.S. Chamber of Commerce vowed to sue over what it called “a blatant power grab” by the agency. “This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy,” Chamber CEO Suzanne Clark said in a statement. “[S]uch overreach will not go unchecked.”
The first suit against the rule, from tax-services company Ryan, dropped Tuesday evening.
In recent years, many states have passed their own laws limiting or banning noncompetes after reports that businesses were applying them to low-wage retail and manual service workers, including fast-food workers, temporary warehouse employees, and security guards. The FTC’s rule makes a ban nationwide, and includes all workers at non-profit companies, even the highly paid executives who are most associated with noncompetes.
These agreements “keep wages low, suppress new ideas and rob the American economy of dynamism,” FTC Chair Lina Khan said. “We heard from employees who, because of noncompetes, were stuck in abusive workplaces.” The ban promises to help create 8,500 new businesses a year, raise workers’ pay by an average of $520 annually, and increase patent filings by 17,000 per year, according to the FTC.
The FTC’s rule requires companies with existing non-compete clauses to inform workers they will not be enforcing those agreements. Senior executives who signed noncompetes will continue to be bound by them, the FTC said, but companies are forbidden to impose noncompetes on senior executives going forward.
The new rule does not apply to workers at nonprofits.
Commissioners voted 3-2 to adopt the rule, along party lines. The law is set to go into effect in 120 days unless a court delays it from advancing.
Companies wishing to protect themselves from competition are still able to use tools like non-disclosure agreements or filing lawsuits over trade secrets, according to the FTC. But Siegal said those tools are less favorable to employers than noncompetes, since they raise the bar for litigating a case, and will make it harder for employers to bring cases against highly -paid managers who take their business to competitors.
“The games that people play are either going to continue at the same rate or increase, and the tools to enforce against them will be decreased,” he told Coins2Day.
“There are all kinds of unfairness in the marketplace. The FTC is focused on unfairness to employees,” he said. As for “the unfairness to people who are victimized by aggressive, if not unlawful business practices…they’ve discounted that sort of unfairness.”
