Benzinga - by Anthony Noto, Benzinga Editor.
The Federal Trade Commission faced legal threats when it first considered banning employers from using non-compete contracts.
The agency went ahead Tuesday and made the rule official.
What Happened: The FTC approved a final rule that bans non-compete agreements nationwide in a 3-2 vote. Democratic commissioners — Chair Lina Khan, Rebecca Slaughter and Alvaro Bedoya — voted in favor of the new rule; Republican commissioners Melissa Holyoak and Andrew Ferguson voted against it.
Discussions on the matter have been underway for well over a year.
The U.S. Chamber of Commerce said in January 2023 it was prepared to challenge the FTC in court over whether the ban is legal. According to Bloomberg News, a court challenge is in the works.
Non-competes, the Chamber argues, benefit both employers and employees. With a non-compete clause, companies are more inclined to invest in training and holding onto employees to avoid losing trade secrets to rival firms.
Recall the 2023 sale of Barstool Sports to Dave Portnoy, which included several non-compete clauses.
The FTC insists that noncompete clauses stifle wage growth, impede entrepreneurial spirit and inhibit labor market efficiency.
The decision follows a 90-day public comment period that garnered over 26,000 responses that were overwhelmingly in support of the proposed ban on non-competes.
Why It Matters: Under the new rule, roughly 30 million American workers will no longer be subject to non-compete agreements.
They’re essentially allowed to pursue new employment opportunities or embark on entrepreneurial ventures without fear of legal repercussions.
The decision is also the first time in decades that the FTC officials issued an economy-wide change regarding competition.
FTC projects economic benefits stemming from the ban on non-competes. The rule is expected to spur the creation of over 8,500 new startups annually, while also leading to higher earnings for workers, with an average increase of $524 per year.
The rule could potentially lower health care costs by up to $194 billion over the next decade as well, the FTC said.
Existing non-competes can remain in place for certain policymaking individuals making over a certain amount each year (constituting less than 0.75% of the workforce).
What’s Next: The ruling is poised to have far-reaching effects on job mobility, innovation and business formation across the U.S.
Employers are prohibited from entering into new non-competes with senior executives. Additionally, employers must provide notice to workers bound by existing non-competes, informing them the agreements will no longer be enforced.
The ban on non-competes is set to take effect 120 days after its publication in the Federal Register.
Now Read: Private Sector Growth Unexpectedly Slows In April, Marks Lowest Increase In 4 Months: ‘Drivers Of Inflation Have Changed'
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