FTC votes 3-2 to ban non-compete clauses for American workers

April 23 (UPI) -- The Federal Trade Commission on Tuesday voted 3-2 to approve a new rule that bans non-compete clauses in contracts in the United States, "protecting the fundamental freedom of workers to change jobs, increasing innovation and fostering new business formation," the agency said.

"Noncompete clauses keep wages low, suppress new ideas and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned," FTC Chair Lina Khan said in a statement.

The FTC, after receiving 26,000 comments during a public comment period, had appeared poised to outlaw the clauses, calling them unfair to workers by preventing them from using their skills freely.

"The FTC's final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market," Khan said.

The commission claims that the final rule will, among other things, raise worker wages, lower health care costs, "boost innovation" and increase American patents by up to 29,000 more a year over the next 10 years.

In a past statement, the FTC said the rule "would generally prevent employers from using non-compete clauses."

"As the notice of proposed rulemaking explained, non-competes are a widespread and often exploitative practice that suppresses wages, hampers innovation and blocks entrepreneurs from starting new businesses," the federal commission stated.

However, companies have used non-compete clauses in contracts for decades to prevent workers and executives from jumping to a competing company, or from starting their own company to compete against them.

But the new rule approved Tuesday -- and which is set to take effect 120 after its published in the Federal Register -- is expected to see legal pushback.

The U.S. Chamber of Commerce said it plans to sue to block the rule, saying how the FTC's new decision to ban employer non-compete agreements "is not only unlawful, but also a blatant power grab that will undermine American businesses' ability to remain competitive."

"This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy," the chamber's president and CEO, Suzanne Clark, said in a statement.

On social media Tuesday, the White House said workers "ought to have the right to choose who they want to work for."

"For millions of workers who make less than $58,656, my [Labor Department] is saying you have the right to overtime protections. If you work extra hours, you deserve extra pay," President Joe Biden said on X.

An FTC fact sheet on the rule change said employers have numerous other ways to protect trade secrets and other key investments, which have been some of the reasons for their support for non-compete clauses.

"Employers often justify using non-competes with their workers to protect confidential information and to get the most out of their investments with their investments in training and capital," the fact sheet said.

"But the record to date shows that in California, North Dakota and Oklahoma -- three states in which employers can't enforce noncompete clauses -- industries that depend on trade secrets and other key investments have still flourished. This shows that employers have other ways to protect these investments."

On Tuesday, the International Brotherhood of Teamsters union posted on X that the organization strongly supports the FTC's choice to ban "abusive non-compete clauses," calling it "a big win for working families and a big defeat for predatory corporations."

The FTC said estimates banning non-compete clauses would increase the workers' earnings by almost $300 billion annually, save consumers close to $148 billion a year on healthcare costs and double the number of companies started by former workers in the same industry.

The rule was initially introduced in January 2023 as Khan, the FTC chair, said the freedom to change jobs "is core to economic liberty and to a competitive, thriving economy."

The U.S. Chamber of Commerce wrote a comment opposing the ban, arguing non-compete clauses help to encourage companies to invest additional resources in training employees without concern that they will take that knowledge to a competitor.

"Such a proposal fails to recognize that non-compete agreements can serve vital procompetitive business and individual interests -- such as protecting investments in research and development, promoting workforce training, and reducing free-riding -- that cannot be adequately protected through other mechanisms such as trade-secret suits or non-disclosure agreements," it said.

Entrepreneur and lawyer Amy Nelson took to social media after Tuesday's vote to thank the FTC "for doing the right thing here."

"Amazon spent years trying to put my husband in federal prison for allegedly violating his non-compete," Nelson wrote on X. "They didn't win, but we lost our home, our future, our careers."