Regulation
Federal Trade Commission Votes to Ban Non-Compete Agreements
Agency final rule that nixes new non-compete agreements would take effect 120 days after it is published in the Federal Register, but at least one group said it will sue to block the action.
Photo cropped from the original by Michael Sauers/Travelin' Librarian Flickr/ CC BY-NC-SA 2.0 Deed
The Federal Trade Commission issued a final rule April 23 widely banning non-compete agreements used extensively in business, including construction, to prevent departing employees from becoming major competitors.
Some employer groups have already pledged to challenge the rule in court, although it does not take effect for months.
The rule bans new non-compete agreements with all workers. It does allow existing non-competes with senior executives to remain, but existing edicts for all other workers will not be enforceable after the rule takes effect. The rule also clarifies that fixed-duration employment contracts do not count as non-competes.
FTC commissioners voted 3-2 to approve the rule, which is set to take effect 120 days after it is published in the Federal Register.
The rule covers contract clauses and “all forms a non-compete might take,” it states, such as workplace policies and handbooks.
Agency officials estimate about 30 million U.S. workers are subject to a non-compete clause or agreement.
North America’s Building Trades Unions wrote in a comment supporting the proposal that its affiliated unions have seen non-competes in the construction industry “artificially depress wages, reduce labor market mobility and interfere with employees’ ability to improve their working conditions and wages by organizing.”
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But some construction industry groups, including the Associated Builders and Contractors and the Mechanical Contractors Association of America, voiced opposition to the rule after the commission published a proposed version last year. In a written comment, the latter said the proposed rules “are a novel and too broad approach” that needed to be revised to reflect specific markets.
ABC argued in its comment that non-competes should be regulated at the state level. A national blanket ban threatens to harm the construction industry—especially small businesses using non-competes to protect their confidential information and intellectual property, it added.
Ben Brubeck, ABC vice president of regulatory, legal and state affairs, said in a statement that the final rule “is a radical departure from hundreds of years of legal precedent” that “will invalidate millions of reasonable contracts.”
ABC also questioned commission authority to issue the rule, claiming the ban violates the federal Administrative Procedure Act. The group did not confirm a legal challenge, but the U.S. Chamber of Commerce said it plans to sue the agency to block the rule.
“Since its inception over 100 years ago, the [commission] has never been granted the constitutional and statutory authority to write its own competition rules,” said Suzanne Clark, chamber president and CEO, in a statement.
Commission officials estimate the ban would result in a 2.7% annual rise in new business formation, an average earnings increase of $524 per year for workers and health care costs lowered by as much as $194 billion over the next decade.
“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,” said commission chair Lina Khan, in a statement.
