FTC Bans Noncompete Agreements, Boosts Worker Protections

The Federal Trade Commission (FTC) issued a final rule that bans most noncompete agreements in employer contracts -- a move the agency argued will boost wages, reduce healthcare costs, and spur innovation.

Over the next decade, the FTC anticipates its ban will drive down healthcare costs by $74 to $194 billion, according to a fact sheet released by the agency.

"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," said Chair Lina Khan in a press release.

Noncompetes prevent employees from working for a competing employer or from opening a competing business even after the relationship with a prior employer has ended. One in five American workers, or 30 million people nationwide, are subject to noncompete clauses, said Benjamin Cady, an attorney in the FTC's Office of Policy Planning. Research has indicated that these agreements suppress wages, inhibit new business formation, and constrain innovation, he added.

Steven Furr, MD, president of the American Academy of Family Physicians (AAFP), applauded the FTC's decision, saying in a press statement that it "puts patients first and ensures family physicians can pursue opportunities that value their expertise and continue to provide high-quality care that their communities need."

However, hospital and business associations blasted the rule as "unlawful," and the Chamber of Commerce has already sued to block the rule.

Chad Golder, general counsel for the American Hospital Association, said in a press release that "the agency's stubborn insistence on issuing this sweeping rule -- despite mountains of contrary legal precedent and evidence about its adverse impacts on the healthcare markets -- is further proof that the agency has little regard for its place in our constitutional order."

Chamber of Commerce President and CEO Suzanne P. Clark called it "not only unlawful but also a blatant power grab" in a press release.

Commissioners Weigh In

Commissioners Rebecca Kelly Slaughter and Alvaro Bedoya joined Khan -- all Democrats -- in the 3-2 vote supporting the rule, while Commissioners Melissa Holyoak and Andrew Ferguson, who are Republicans, opposed the rule.

Prior to the vote, Holyoak explained that her opposition to the rule does not mean she endorses all noncompete agreements.

"However, no matter how important, conspicuous, and controversial the issue, an administrative agency's power to regulate in the public interest must always be grounded in a valid grant of authority from Congress," she said, adding that, in her view, the final rule exceeds those authorities.

She would support the commission in prosecuting certain anti-competitive noncompetes in conjunction with state attorneys general when merited, she said, noting that the rule is unlikely to withstand legal challenges.

Ferguson opposed the rule on similar grounds, stating that the agency lacked the power to "nullify tens of millions of existing contracts ... and to declare those contracts unlawful across the whole country."

On the other hand, Slaughter said that it is "profoundly unfree and unfair for people to be stuck in jobs they want to leave, not because they lack better alternatives, but because noncompetes would preclude another firm from fairly competing for their labor, requiring workers instead to leave their industries or their homes to make ends meet."

While this move is a "huge step forward for American workers," she clarified that "due to limitations on the FTC's jurisdiction, there are still some workers who will not be able to take advantage of the critical benefits of this rule," such as "employees of certain not-for-profit corporations."

Slaughter recalled "powerful stories" in the rule-making record of healthcare workers employed by nonprofits harmed by noncompetes, and said she hoped agencies with jurisdiction over healthcare and Congress will "take up this charge."

She warned businesses that claim nonprofit status "but are really organized for the profit of [its] members, you are within our jurisdiction and covered by the rule." Only "true nonprofits" are excluded, she said.

The final rule states that "administrative proceedings and judicial decisions involving the Commission or the IRS have identified numerous private benefits that, if offered, could render an entity a corporation organized for its own profit or that of its members under the FTC Act, bringing it within the Commission's jurisdiction."

Furr noted that the AAFP was "encouraged to see that the FTC intends for this ban to extend to many nonprofit entities," as such health systems often have "significant financial assets" and should not be allowed to continue to "restrict patient access and physician choice in employment."

Bedoya confessed he was initially skeptical about extending a noncompete ban to high-earners. Then he read about physicians forced to move their families out of state to find work.

"The pandemic killed a million people in this country, and there are doctors who cannot work because of noncompetes," he said.

The Nitty Gritty

The rule is based on a finding that noncompetes are "an unfair method of competition" and that employers who enter into noncompetes or enforce them violate provisions of the FTC Act, according to the press release

The rule bans new noncompete clauses for all workers, as well as existing noncompete clauses for most workers, with the exception of senior executives -- defined as those who earn more than $151,164 annually and whose responsibilities include policy making.

Companies will be required to provide notice to employees that noncompete clauses will not be enforced against them -- a change from the proposed rule, which called for employers to formally rescind the agreements, the press release noted.

The proposed rule, issued in January 2023, garnered more than 26,000 comments, 25,000 of which were supportive.

FTC expects the final rule to boost worker wages by $400 to $488 billion over the next decade, for an increase of $524 in the average worker's earnings annually. Additionally, the final rule is predicted to spur a 2.7% increase in new businesses -- 8,500 in all -- and lead to thousands more new patents annually.

The final rule will take effect 120 days after it is published in the Federal Register.

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