The FTC is banning noncompete agreements. Did your job search just get easier?

By Andrew Keshner

FTC vote marks 'the beginning of the end for noncompetes,' employment lawyer says - but the ban's future looks uncertain

Federal regulators are tearing up the controversial agreements that forbid millions of workers from taking jobs at companies that compete with their ex-employer. But noncompete clauses might not be gone for good, employment lawyers say - at least, not yet.

More than a year after proposing to block most noncompete agreements, the Federal Trade Commission's top officials voted 3-2 on Tuesday to do just that.

Under the FTC's ban, employers would have to tell workers their noncompete agreements are no longer enforceable. The rule also would ban most noncompetes in the private sector going forward. Existing agreements for people in "senior executive" roles go untouched, but the rule bans future noncompete agreements for these C-suite leaders going forward.

Advocates of the ban, who have argued that noncompetes can stymie pay and career gains, celebrated the vote result as a win for workers. About 30 million people - including many low-income workers who can't afford lawyers to negotiate contract terms or fight lawsuits alleging a breached agreement - are bound by noncompetes, the FTC said. That translates to about one in five workers.

The agency said it has the authority to prevent unfair competition in markets, and its chair, Lina Khan, alleged Tuesday that these agreements "keep wages low, suppress new ideas, and rob the American economy of dynamism." But a new lawsuit from organizations including the U.S. Chamber of Commerce and the Business Roundtable claims it's the FTC that's being unfair.

"The sheer economic and political significance of a nationwide noncompete ban demonstrates that this is a question for Congress to decide, rather than an agency," said the lawsuit filed Wednesday in a Texas federal court.

Where does this leave workers bound by noncompete agreements who are eyeing other jobs? They can have hope, but should still hold their breath, according to workers' attorneys.

"I think this is the beginning of the end for noncompetes," Mark Hanna, the vice president of public policy at the National Employment Lawyers Association, said after the vote. "Your employer is far less likely to seek to enforce these than [it was] yesterday."

But for now, Hanna, a founding partner at Murphy Anderson, added, "I wouldn't do anything dramatic."

Some employers "may be more gun-shy today," said Kerry Zaroogian, a partner at Outten & Golden, where she helps executives negotiate their employment terms. Still, "I would not advise my clients to make major life decisions" about their next career move based on the rule's uncertain future, Zaroogian said.

What is a noncompete agreement?

Noncompete agreements are a contractual deal between workers and their employers, according to the FTC. They typically block workers from going to a rival employer or starting a business vying for the same customers in a certain region and for a set time after employment ends.

The problem is that these agreements may anchor people in jobs they want to leave, or scare them from leaving with the threat of a lawsuit, the regulator said.

The FTC received more than 26,000 comments on its proposed ban, the vast majority of which supported an end to noncompetes, officials said. The lengthy final rule includes stories from doctors, salespeople, a bartender and other workers all bogged down by these clauses.

Businesses have other ways of protecting themselves from the threat of former employees trying to snag clients or use trade secrets. Nondisclosure agreements and nonsolicitation agreements don't count as prohibited noncompete agreements, the FTC said, as long as they aren't too broad.

Compared with nondisclosure agreements, nonpoaching clauses and other restrictions, noncompetes are "the bluntest tool that employers have at their disposal," Zaroogian said.

If an ex-employer decides to sue, Zaroogian said, it's expensive to fend off a lawsuit alleging a violation. Job candidates bound by noncompetes may also be less appealing to potential employers who don't want to risk getting roped into a case, she said.

The FTC said existing noncompetes for senior executives should remain intact, based on the idea that these people had better bargaining power and awareness of these provisions. A senior executive is someone earning at least $151,164 a year and in a "policy-making position," according to regulators; less than 1% of workers with a noncompete would fall under this category.

The ban is not reaching all workers who may benefit from it, FTC Commissioner Rebecca Slaughter noted Tuesday. The FTC's jurisdiction doesn't extend to certain nonprofit organizations, she said, and the record "includes powerful stories from healthcare workers who are employed by nonprofits and have seen noncompetes hurt patients and provider."

When does the FTC's noncompete ban take effect?

Technically, the rule would take effect 120 days after publication in the government's federal register. But lawsuits may push that date back or postpone it indefinitely. The Chamber of Commerce lawsuit seeks to permanently block the rule.

The rule could be tangled up in litigation for months, or perhaps years, said Susan Sperber, a partner at the law firm Lewis Roca. If the legal fight stretches past November's presidential election, a transition to a new administration could tank the rule altogether, said Sperber, who primarily represents management in employment-law matters.

But even with federal rule up in the air, there's already a patchwork of state laws governing these agreements. California, North Dakota and Oklahoma have longstanding noncompete bans. Minnesota joined the ranks last year with a law prohibiting the enforcement of noncompete agreements that started after July 2023. New York state lawmakers passed a broad ban on noncompetes last year that Gov. Kathy Hochul, a Democrat, vetoed in December.

More than 10 states and the District of Columbia forbid using and enforcing noncompetes against low-wage workers.

Hanna commonly reviews noncompetes that wouldn't hold up in court because of their broad wording, he said. But even if the FTC ban is bound for court, Hanna said, there's something to be said for the shifting mood on noncompetes. He said employers could be less likely to sue over alleged violations, given the greater scrutiny of these clauses.

"The scales are now heavily weighted to the employees who are arguing these noncompetes impinge on their freedom and are anticompetitive," he said.

How a noncompete ban could affect wages and consumer prices

The noncompete ban would let workers hop to jobs with better pay, the FTC said. Wages could rise between $400 billion and $488 billion in the next decade without the restrictions, translating to an extra $524 per year for workers on average, the regulator said.

If past studies provide any clue, pulling back noncompetes could translate to wage gains of around 3% to 4%, according to Evan Starr, an economist and University of Maryland associate professor who has studied noncompetes.

Hourly wages increased 2% to 3% for low-wage Oregon workers after the state's 2008 noncompete ban, Starr found. Following Hawaii's 2015 noncompete ban for tech workers, wages for new hires increased 4%, according to his research.

"The best evidence we have comes from state-level experiments," but even an increase in the 3% to 4% range could be an underestimate of the FTC rule's effects, Starr said.

But as prices remain uncomfortably high against a backdrop of moderating inflation, would businesses pass the costs associated with wage increases on to consumers?

The National Retail Federation says yes. "This would certainly be the case in the retail industry where margins can be low, and any increased costs are necessarily passed along to consumers," the trade association's representatives wrote in comments to the FTC last year.

For cashiers, waiters, baggers and other lower-paying jobs that represent "the backbone of the industry, retailers almost never use noncompetes," the trade organization wrote, opposing the ban. But for some other jobs, it argued, noncompetes can be necessary.

"Retailers judiciously utilize noncompete clauses to protect trade secrets, customer relationships and confidential information," David French, the organization's executive vice president, told MarketWatch ahead of the FTC vote. "NRF has long maintained that noncompete clauses are common, legitimate and legal."

Starr says the chances of higher prices are "overblown," because noncompete bans would open new chances for people to start businesses with lower prices that challenge established rivals.

"It's not obvious to me at all prices would rise, and there's good arguments why they would go down," he said.

The FTC said Tuesday it didn't expect price increases due to the ban, pointing at evidence of physician-clinic prices falling where noncompetes were not enforced.

How to negotiate a noncompete at your next job

It's entirely possible for job seekers to try to negotiate or limit the terms of a noncompete agreement, Zaroogian said.

In the wake of the FTC ban, it's possible employers may lean toward other post-employment restrictions, like nondisclosure agreements and nonsolicitation agreements.

Related: Can you negotiate severance if you're laid off? It's possible - and it's the 'No. 1 thing' most workers leave on the table.

"If I was advising employers on a going-forward basis as to what they should be doing, I would be advising them to look at other tools in [the] toolbox," Sperber said.

(MORE TO FOLLOW) Dow Jones Newswires

04-24-24 1429ET

Copyright (c) 2024 Dow Jones & Company, Inc.