On Tuesday, the Federal Trade Commission (FTC) made a significant decision, voting 3-2 to prohibit noncompete agreements that restrict millions of employees from joining competitors or launching rival businesses after leaving a job.
However, the ruling has immediately faced legal opposition, with more challenges anticipated.
FTC Chair Lina Khan stated, “Non-compete 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 noncompetes are banned.”
The FTC estimates that around 18% of the U.S. workforce, approximately 30 million workers ranging from quick-service restaurant employees to CEOs, are affected by such agreements.
In April 2023, the National Restaurant Association and the Restaurant Law Center voiced concerns to the FTC about the potential negative impact of banning noncompete clauses, especially within the restaurant industry.
They argued that the FTC lacked legal authority to enforce such a ban, advocating instead for state regulation, which has been in place for over 200 years.
The final rule, as outlined by the FTC, will prohibit new noncompete agreements and mandate that companies inform current and former employees of their nonenforcement.
Existing agreements for most employees will need to be discarded, although senior executives may still be subject to them, a departure from the initial proposal.
Commissioner Rebecca Slaughter emphasized the importance of freedom for workers, stating, “It is so profoundly unfree and unfair for people to be stuck in jobs they want to leave, not because they lacked better alternatives, but because noncompetes preclude another firm from fairly competing for their labor.”
Despite the FTC’s decision, its future implementation is uncertain due to expected legal challenges from business groups. The U.S. Chamber of Commerce has voiced opposition, with some companies, such as Ryan, a tax service and software provider based in Dallas, already filing suit.
Business advocates argue that noncompete agreements are essential for safeguarding intellectual property and proprietary information.
Suzanne Clark, president and CEO of the Chamber, criticized the FTC’s move as “a blatant power grab that will undermine American businesses’ ability to remain competitive.”
This ruling highlights a broader divide between the business community and the Biden administration on issues such as corporate practices and competition.
While the administration, Democrats, and labor advocates view noncompete agreements as detrimental to workers and competition, business groups assert their necessity for protecting businesses and innovation.
The opposition from the National Restaurant Association and the Restaurant Law Center underscores concerns about the FTC’s authority and the historical jurisdiction of states in regulating noncompete clauses.
Founded in 1919, the National Restaurant Association represents over a million restaurant and food service establishments, while the Restaurant Law Center is an independent public policy organization affiliated with the Association.
