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The Federal Trade Commission voted 3-2 Tuesday to ban employee noncompete clauses, but the rule faces legal challenges.

FTC bans noncompete clauses, but move faces legal challenges

Panel votes 3-2 to bar rule that impacts about 30 million workers

The Federal Trade Commission voted 3-2 Tuesday to ban noncompete agreements that prevent millions of employees from working for competitors or starting a competitive business after they leave a job. But the move has already drawn its first legal challenge, and more are promised.

“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,” said Lina Khan, FTC chair, in a statement. “The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

The FTC estimates 18% of the U.S. workforce is covered by noncompete agreements, or about 30 million workers, from quick-service restaurant workers to CEOS.

In April 2023, the Washington, D.C.-based National Restaurant Association and the Restaurant Law Center submitted comments to the FTC, asking it to withdraw its notice of proposed rulemaking on noncompete clauses.

The groups said that should the proposed rule go into effect, unanticipated consequences could harm employees and consumers in the restaurant industry and could reduce competition.

“While the public face of the restaurant industry may be the many waitstaff, hostesses, bartenders, line cooks, dishwashers, and others who provide the backbone of an operation, restaurant owners almost never use non-competes with these types of employees,” said Jordan Heiliczer, director of labor and workforce policy at the National Restaurant Association, in a statement at the time. “In fact, it’s not uncommon for hourly employees to move between jobs at two competing restaurant brands, all with the knowledge of their restaurant employers.”

The association and Law Center said the FTC did not have the legal authority to ban noncompete clauses and that the regulation of these agreements should fall to the state governments, which have been regulating them for more 200 years.

The FTC said the final rule would ban new noncompete agreements and require companies to let current and past employees know they won’t enforce them. Companies will also have to throw out existing noncompete agreements for most employees, although in a change from the original proposal, the agreements may remain in effect for senior executives.

Rebecca Slaughter, an FTC commission, said in a prepared statement: “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, requiring workers instead to leave their industries or their homes to make ends.”

The new rule is scheduled to be effective 120 days after being published in the Federal Register.

The ban’s future is uncertain, however, as business groups that oppose the rule are expected to take legal action to block its implementation. The U.S. Chamber of Commerce has expressed opposition, and a Dallas-based Ryan, a tax service and software provider, has already filed suit to challenge the rule.

Business groups say noncompete agreements are crucial for protecting information and intellectual property.

Suzanne Clark, the Chamber president and CEO, said the FTC vote to ban noncompetes was “a blatant power grab that will undermine American businesses’ ability to remain competitive.”

The business community and the Biden administration have come down on opposite sides of such FTC measures on corporate price gouging, junk fees and alleged anticompetitive behavior.

The Biden administration, Democrats and labor advocates have argued noncompete agreements limit workers’ mobility, depress their wages and harm entrepreneurship and competition in the U.S. economy.

The National Restaurant Association and the Restaurant Law Center said their opposition to rule was based on three grounds:

  • Restaurant owners use non-competes sparingly with senior-level employees to protect confidential information. Restaurant owners do not typically use them with restaurant managers or hourly employees.
  • The commission lacks clear congressional authorization to ban or regulate noncompete agreements, which would be required for a panel’s rule making on non-competes.
  • The regulation of non-compete clauses has been a state law issue for more than 200 years.

The National Restaurant Association was founded in 1919 and includes more than a million restaurant and foodservice outlets. The Restaurant Law Center is an independent public policy organization affiliated with the National Restaurant Association.

Contact Ron Ruggless at [email protected]

Follow him on X/Twitter: @RonRuggless

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