FTC Bans Worker Noncompete Clauses

The Federal Trade Commission on Tuesday said employers could no longer, in most cases, stop their employees from going to work for rival companies.

The sweeping action could help create jobs, raise wages and increase competition among businesses, the agency said. But the action is all but certain to be challenged in court by businesses that say they need to protect trade secrets and confidential information.

The move bars contracts known as noncompetes, which prevent workers from leaving for a competitor for a certain amount of time, in most circumstances. Noncompetes cover about 30 million U.S. workers, the trade commission said, in a variety of jobs that include TV news producers, hairdressers, corporate executives and computer engineers.

The commission has said the proposal would raise wages by forcing companies to compete harder for talent. It was approved in a 3-to-2 vote. Commissioners Melissa Holyoak and Andrew N. Ferguson, both Republicans, voted against the measure.

“The F.T.C.’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business or bring a new idea to market,” the commission’s chair, Lina M. Khan, said in a statement. She estimated the decision would lead to the creation of 8,500 start-ups created in a year and up to $488 billion in increased wages for workers over the next decade.

The U.S. Chamber of Commerce vowed to sue the F.T.C. to block the proposal, calling it “an unlawful power grab” in a statement shortly after the vote. The chamber, as well as the two dissenting commissioners, has argued that the F.T.C. doesn’t have the authority to address this issue and that it should be left to the states.

Employers have argued that noncompete contracts provide an incentive to invest in employees — because they ensure that the worker won’t leave to join a competitor.

The rule would become law 120 days after it is published in the Federal Register, which will probably happen in a few days. But legal challenges could delay or block the change.

Noncompete contracts affecting senior executives can remain in effect, the commission said, but employers are barred from trying to impose new noncompetes on any employee, including executives.

The new rule defines executives as employees “in policy-making positions” who make at least $151,164 annually. It orders employers to notify nonexecutive employees bound by an existing noncompete that it will no longer be enforceable.

Some states, including California and Oregon, have moved to restrict noncompetes on their own.

In December, Gov. Kathy Hochul of New York vetoed a bill that would have banned noncompetes in the state. She said the bill should have been narrower and apply only to low-wage workers. Wall Street staunchly opposed the legislation, which the State Legislature’s Democratic majority passed.

Studies have shown that noncompetes suppress wages because switching jobs is the most efficient way workers can increase how much they make.

“This would be an immediate shock that would allow millions of workers to be free to take a better job in their industry,” said Evan Starr, an economics professor at the University of Maryland. “I would expect the labor market to increase almost overnight.”

Stefanie Camfield, an assistant general counsel at Engage PEO, a human resources consulting firm, said her clients had asked more about noncompetes in advance of the agency’s decision. While some of them use noncompetes to prevent workers from leaving for rival firms, she said, others struggle to hire workers bound by the same kind of agreements.

“We see the flip side of the coin as well,” Ms. Camfield said.

Under Ms. Khan, the F.T.C. has taken a more aggressive stance toward regulating corporate America. It has tried to expand its role in proactively setting rules for businesses in addition to its work suing companies for legal violations. It has proposed new regulations to govern online and children’s privacy and ban hidden fees that are attached to consumer purchases.

David McCabe contributed reporting.