Yahoo Finance FTC Just Banned 1 Major Way Bosses Control Workers. Here's How It Affects You.
When you get a new job, you might be one of the 30 million Americans who also signed a noncompete agreement.
A noncompete agreement stops you from going to work for a competitor or from starting up a competing business of your own, typically within a geographic zone and a set period of time after you leave a job.
You may not realize the consequences of what you signed until you try to leave for a new job.
In January 2023, the Federal Trade Commission proposed a comprehensive noncompete ban and opened their proposal to public comment. Thousands of responses poured in from professionals who shared stories of how these noncompetes forced them to stay in jobs with toxic working conditions, to uproot their families, and to stop serving their patients and clients.
As one Appalachia-based physician put it in their comment: “Providers with aggressive noncompetes must abandon the community that they serve if they chose to leave their employer. Healthcare providers feel trapped.”
From doctors and janitors to sandwich makers and yoga instructors, noncompetes have become one of the main tools employers across industries can use to control what kind of job an employee can take next.
They are not usually negotiable if you’re a new hire who wants to keep your job. Or as one car power-washer explained in their public FTC comment: “My boss said that if I didn’t sign before the end of the week, not to come in the next week ... I’d like to start my own business but I would have to find another job and wait five years.”
The FTC estimates that one in five Americans are under these restrictive employment agreements right now.
But no more, according to the FTC.
On Tuesday, the federal agency set a historic precedent and banned noncompete agreements nationwide in a 3-2 vote, saying that they are an “unfair method of competition” and therefore in violation of the Federal Trade Commission Act.
The FTC cited research about how noncompetes suppress wages, and estimated that its noncompete ban would raise workers’ wages between $400 billion and $488 billion over the next decade.
“It’s clear the freedom to leave your job and take another job is fundamental to a free and fair economy,” said FTC commissioner Rebecca Kelly Slaughter in her Tuesday presentation on the rule.
Whom would this noncompete ban effect?
“The final rule bans new noncompetes with all workers, including senior executives after the effective date,” according to the FTC’s fact sheet on its rule. In other words, there is no salary threshold and independent contractors are covered by this ban, too.
However, if you’re a nonprofit employee, you would not be covered by this rule, because the FTC only covers the private sector, said Daryl Leon, a New York-based noncompete, trade secret and employment law litigator at BakerHostetler. There is also an exception for noncompetes that are made when a business is sold.
And what if you already have a noncompete? Under the rule, existing noncompetes are also no longer enforceable after it goes into effect and your employer must give you “clear and conspicuous” notice of this fact, according to the FTC. In its final ruling, the agency outlined a scenario where a former employer would individually text, email, or mail a notice to past workers about their rights with language like: “A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a noncompete clause.”
However, existing noncompetes remain in effect for senior executives because the FTC said this group is less likely to be exploited by them. The FTC defined a senior executive as someone who makes more than $151,164 annually and is in a “policy-making position.”
When would this ban go into effect?
In the final ruling, the FTC said the ban would be effective starting 120 days after the rule gets published in the federal register. In other words, by mid-August under the best of circumstances. But the FTC rule is also likely to face significant legal challenges from firms and trade groups seeking an immediate stay of the ban’s implementation.
Leon said that more than likely a nationwide injunction will be issued by a district court, and then that would go through the appellate courts, and potentially all the way up to the Supreme Court.
“There is very little chance, it seems, that this rule in its current form will ever go into effect without the Supreme Court blessing,” Leon said.
Businesses typically say that they need noncompetes to protect trade secrets and customer relationships, as well as their investments in worker training.
In its public comment to the FTC against the ban, the U.S. Chamber of Commerce, the nation’s largest business lobby, said noncompetes were needed to reduce “free-riding,” and that nondisclosure agreements and trade secret suits were not enough protection for “vital procompetitive business and individual interests.”
The Chamber of Commerce said Tuesday that the rule “sets a dangerous precedent for government micromanagement of business” and that it plans to sue the FTC over the rule.
What can employers and employees expect going forward?
Even without noncompete bans, employers still have other tactics to stop you from quitting, according to Reid Skibell, a New York-based civil litigator at Glenn Agre Bergman & Fuentes who counsels professionals on breaches of noncompetes.
If noncompetes become unavailable, Skibell said he expects more “golden handcuffs” tactics to be more widely used on senior employees. He cited the common practice of employers delaying bonuses until the first quarter of the following year to deter employees from leaving, and loans that are only forgiven over a certain time that an employee remains employed.
Skibell said he also expected major employers to rely more on confidentiality restrictions and nonsolicitation bans to retain lower-level employees.
And if you want a glimpse of the future, look at California, a state that has already banned noncompetes, said Orly Lobel, the director of the Center for Employment and Labor Policy at University of San Diego. In California, banning noncompetes helped to bring entrepreneurship and venture capital investment to the region, she said.
That’s because the power dynamic between a boss and employee shifts when noncompetes are no longer on the table. Employers “learn to use carrots rather than sticks to secure retention,” Lobel said, citing incentives such as stock options and greater company innovation to get employees to stay in California.
Without noncompetes, employees have more leverage to leave toxic jobs, too.
Take it from a bartender, whose story was highlighted in the FTC final rule. This bartender said they were being sexually harassed at their old bar, so they took a job at a competing bar with better wages and conditions, even though it violated their two-year noncompete agreement.
“I took the new job, thinking our legal system wouldn’t allow a massive company with over 20 locations to sue a young entry-level worker with no degree. In December 2021, I was sued for $30,000,” the bartender wrote.
Fighting a noncompete in courts can result in costly litigation fees, said Basel Musharbash, a Texas-based antitrust lawyer who has defended employees against noncompetes. He said that the less wealthy and less expert that an employee is, the more likely it becomes that they cannot defend themselves against the enforcement of a noncompete.
“We currently have a system that lets employers basically write noncompetes, regardless of whether they’re legal or not, and then just intimidate and bully employees into submission to their terms. And that ends with this rule,” Musharbash said. He noted that the FTC rule will hopefully deter lawyers from adding noncompetes into new employment contracts.
And in the meantime, employees can use the FTC rule against noncompetes to negotiate their way out of one.
Until it goes into effect, Leon said that the FTC’s rule does not change workers’ conditions right now legally, but it could still be a way for employees to advocate on their own behalf.
“When they are leaving employment or thinking of leaving employment, it’s ... more ammunition that they have available to them to try and say, ‘If I have a noncompete, employer, you should waive it, or you should not enforce it against me,’” he said.
