FTC votes to ban non-competes

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The Federal Trade Commission (FTC) has voted 3-2 to enact a nationwide ban on non-compete agreements, which are contractual clauses that prevent employees from working for competitors or starting competing businesses within a certain period after leaving a job. This decision is expected to have significant implications for the American workforce, affecting an estimated 30 million workers who are currently bound by such agreements. The new rule will prohibit the creation of new non-compete agreements and render existing ones unenforceable for most employees, with the exception of senior executives who earn over $151,164 annually and hold policy-making roles. The rule is set to take effect 120 days after its publication in the Federal Register. The FTC's action follows a proposal first introduced in January 2023 and is part of a broader campaign by the Biden administration against corporate practices that are seen as limiting worker mobility and suppressing wages. The FTC argues that non-compete clauses stifle wage growth, suppress innovation, and hinder the dynamism of the American economy, including the potential creation of over 8,500 new startups annually. The decision has been met with mixed reactions. Supporters, including worker advocates and some Democratic commissioners, argue that the ban is necessary to rein in the increasingly common practice of requiring workers to sign non-compete agreements, even in lower-paying service industries. They believe that banning noncompetes will increase worker earnings by up to $488 billion over the next decade and will lead to the creation of more than 8,500 new businesses each year. However, the FTC's two Republican commissioners, major business groups, and some industry stakeholders have criticized the rule. They argue that non-compete agreements are crucial for companies to protect trade secrets and promote competitiveness. Critics also question the FTC's jurisdiction over such agreements and have vowed to challenge the rule legally. For instance, the U.S. Chamber of Commerce and tax services firm Ryan LLC have announced their intentions to file lawsuits against the ban. The rule will require companies with existing non-compete agreements to scrap them and to inform current and past employees that they will not be enforced. While the rule does not exempt any specific jobs or industries, it will not apply to existing agreements signed by senior executives. The FTC does not regulate certain industries, including banks and nonprofit organizations, and the ban on noncompetes would not affect nondisclosure or nonsolicitation agreements unless they are deemed substitutes for noncompetes. The FTC's decision represents a significant shift in federal policy regarding employment contracts and could potentially reshape the labor market by enhancing worker mobility and wage growth. However, the anticipated legal challenges may delay or impact the implementation of the rule.
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