(CN) — The Federal Trade Commission issued a landmark ruling Tuesday with a broad ban on noncompete agreements for U.S. workers.
Noncompete agreements are clauses in many employment contracts which make it illegal for workers to find other jobs in their employer's sector within a certain time period. Some also prohibit workers from starting businesses which compete with their employer. The FTC estimates that as many as one in five American workers — some 30 million people — are subject to noncompete agreements.
The new FTC rule will ban employers from imposing any new noncompete agreements once it takes effect 120 days after it's published in the Federal Register. It will also void existing noncompetes, with one exception, and compels employers to provide workers with notice that their noncompete agreements are no longer enforceable.
The rule does not apply to nonprofit employees.
The commission provided numerous worker testimonials as part of its 570-page final ruling, including by laid-off employees who were unable to find new jobs in their profession due to a noncompete agreement, and companies that were unable to attract new employees for the same reason. FTC chair Lina Khan said in a statement Tuesday that the new noncompete prohibition is meant to prevent situations like those from arising.
“The FTC’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,” Khan said.
Her outlook is not unanimous among the commission's five leaders. Tuesday's rule was the result of a narrow 3-2 vote, with the dissenting commissioners arguing the rule won't stand up in court.
And it already has its challengers from conservative and pro-business quarters; only an hour after the FTC published its ruling, the U.S. Chamber of Commerce announced its intention to sue the commission over what it called an "unlawful power grab."
"This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy," Chamber president and CEO Suzanne Clark said in a prepared statement. "The Chamber will sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked."
Such legal challenges were predictable, said Alí Bustamante, deputy director of the progressive Roosevelt Institute think tank. Amid a revival of labor militancy across the U.S., Bustamante said the FTC ruling could give workers more power in the labor market.
"Workers will have the opportunity to switch jobs without fearing retaliation from their employers. This is a catalyst ... to keep labor dynamism going," Bustamante said.
The new rule's one exception was actually meant to appease business-sector critics. Though it bars all new noncompete agreements, it allows businesses to continue enforcing pre-existing noncompetes against "senior executive" employees —those who make more than $151,164 annually and "who are in policy-making positions."
Echoing Bustamante's comments, University of Illinois labor law professor Matthew Finkin said it's not impossible the ruling will eventually be struck down by the courts, particularly given the current Supreme Court conservative majority's hostility to the federal administrative state.
"They may say 'it's too big a change for an agency to make,'" Finkin said. "This court can do whatever it damn well pleases, and it has."
In that case noncompete rules would return to the states. With relatively little federal guidance on the issue, Finkin said, the political gulfs between different state governments could result in workers across state lines facing very different conditions.
"Then we're back to square one. Each state will do its own thing. It's a lawless zone," he said.
Despite the threat of legal challenges, both men said the new rule could potentially benefit current workers in major ways. Besides giving employees more leverage in the labor market, Bustamante said workers would likely see an increase in wages as companies fight to hold on to them. The increased ability of workers to switch jobs, he added, could also force changes on Capitol Hill.
"I think if we see people job-switching, it could pressure Congress to ban noncompete agreements at the legislative level," Bustamante said.
Finkin said that even if the courts eventually turn against the ruling, it would give low-wage workers more immediate agency over their lives.
"Workers at Jimmy Johns, sandwich rollers, they're putting these guys in noncompetes," he said.
Finkin also argued that the rule's judicial fate wasn't a forgone conclusion. As much as the Supreme Court has recently tried to curtail the power of federal agencies like the Securites and Exchange Commission and the Environmental Protection Agency, Tuesday's noncompete ban touches on a more sensitive sociopolitical nerve of American capitalism.
"Our system is firmly wedded to praise of the idea of competition," he said. "You can't make a law that says 'you can't compete with me.' We believe in competition."
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