U.S. Federal Trade Commission Votes To Ban Non-Compete Agreements

The five-member FTC, which enforces antitrust laws voted along party lines 3-2 to approve the rule, on the basis that non-compete agreements limit worker mobility and suppress wages. The rule, which was first proposed by the Biden Administration in 2023 will take effect in August unless it is blocked by the courts.

Democrats, the commission and worker advocates who support the rule say it is necessary to limit the increasingly common practice of requiring employees to sign non-compete agreements in businesses across the spectrum, from the biggest multinationals to small and medium-sized businesses (SMBs). Indeed, while traditionally these contracts applied to high paid professionals, today they proliferate even in low paying service industries like fast food.

The FTC reports that banning non-compete agreements will increase worker earnings by up to $488 billion over the next decade. It adds that the rule will create more than 8,500 new businesses each year, many of them SMBs.

FTC Chair Lina Khan explained that non-compete agreements restrict employee opportunities by impeding their ability to change jobs. “Robbing people of their economic liberty also robs them of all sorts of other freedoms, chilling speech, infringing on their religious practice, and impeding people’s right to organize,” Khan said.

California, Minnesota, Oklahoma and North Dakota have already banned non-compete agreements.

The FTC’s two minority Republican commissioners said federal law does not allow the FTC to adopt such rules prohibiting conduct that it finds are anticompetitive. Many business and trade organizations have similarly criticized the rule as uncompetitive, arguing for example that non-compete agreements are crucial to protect trade secrets. And while that may make sense for some industries, it could be more difficult to apply to preparing hamburgers.

States attorneys general and business law firms have already filed or threatened to file legal challenges to the rule, alleging such contracts benefit companies, workers, and the economy.

We take no position on the new rule. Nonetheless, while application of the rule will take some time to work its way through the courts, SMBs would be wise to review their current employment agreements to determine if they are compliant, or even if they prefer to proactively delete non-compete language now (if that’s a direction they choose to take).

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Robert Unterberger

VP - Solutions

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