This week, the Federal Trade Commission (FTC) ushered in a sea change with its new rule on noncompete agreements. The FTC approved a final rule with a 3-2 vote prohibiting the enforcement of most noncompete employment agreements for U.S. workers in every sector except for nonprofit employees.
Background of Noncompete Agreements
An estimated 30 million U.S. workers will no longer be bound by contracts that limit their freedom to go work for a competitor employer.
Sectors and Demographics Most Impacted by Noncompetes
Noncompete agreements can be found across the employment spectrum, from high-level executives to lower-wage workers. Even security employees and fast-food employees making below $20 per hour are often constrained by noncompete agreements.
Impact on Workers and the Labor Market
In assessing the impacts of the ruling, proponents of the FTC rule argue that noncompete agreements interfere with a free labor market of at-will employment, thereby hurting workers who cannot freely pursue their self-interest.
At-Will Movement Within Labor Market Is Best Way to Increase Pay
The FTC claims that moving freely within the labor market is the primary way workers can increase pay.
Noncompetes Limit Total Job Availability For Individuals
Another limiting factor of noncompete agreements is that certain employment opportunities are categorically unavailable to those under the constraints of a noncompete agreement, thereby effectively restricting the overall availability of jobs on the market for any particular employee. This further impacts the economy.
The Scope of the New Rule
The FTC rule prohibiting enforcement of noncompete agreements applies to all labor sectors except nonprofit employees. Barring legal challenges and a court injunction against the rule taking effect, the rule will go into effect in four months.
Opposition from Business Groups
Business groups are the major interest groups opposing the new FTC rule. The business community has criticized the rule as overly broad and has stated concerns that businesses may not be able to adequately protect their proprietary information from competitors.
Furthermore, noncompete agreements are often a way for firms to hold onto their client and customer relationships rather than allowing employees to take clients with them when they depart the company or firm.
Legal Challenges Anticipated
Legal challenges to the ruling are expected as the formidable U.S. Chamber of Commerce has stated its intent to sue on the basis that the FTC has reached beyond the scope of its regulatory authority.
Perspectives from FTC Commissioners
FTC Commissioners were split 3-2 along party lines, with three Democrats in favor of the rule and two Republicans opposed. Republican commissioners stated that the FTC was overreaching its authority in creating sweeping change with little to no nuance between types and sizes of employers and the sensitivities of different industries to losing employees to competitors.
Economic and Innovation Implications
California has long maintained a ban on noncompetitive agreements. Proponents of the new FTC rule point to the innovation in California as a model for how certain sectors such as technology benefit from an environment featuring ease of mobility and the synergies that exist when innovators move within companies over a career.
Tech Industry in California Poster Child for Noncompetes
Silicon Valley has benefited from the opportunities afforded to innovators to move within the sector. This freedom has led to rapid growth and accelerated innovation that leads the economy today.
Broader Implications for the Labor Market
The Biden Administration has been focusing on labor protections. The Administration recently acted to alter the way overtime pay is regulated. This action by the FTC to increase mobility for workers is a second step in the Administration’s efforts to boost workers’ ability to determine their own economic and employment future.
Reaction from Academia
While noncompete agreements are traditionally considered as applying to top-level executives or professionals in a firm not being able to take clients with them to a new venture, Columbia University professor Alexander Hertzel-Fernandez demonstrates that lower-income workers, such as fast-food employees or security guards, are equally constrained by noncompete agreements.
These workers do not have the economic power that the upper-level executives have to negotiate terms with their employer, putting them at significant disadvantage.
