What to know about the FTC's crackdown on noncompete agreements by employers

John Yang:

This week, the Federal Trade Commission voted to bar companies from using what are called noncompete agreements to keep employees from taking new jobs with competitors or starting competing businesses.

The FTC estimates that 30 million Americans, or about one in five workers, are covered by these restrictions, and they range from CEOs to hourly workers. The day after the vote, the U.S. Chamber of Commerce and other business groups went to court. They're trying to block the new rule before it's to take effect in August.

Taylor Giorno is the business and lobbying reporter for The Hill, which covers politics and policy. Taylor, why is the FTC, or why did the FTC say they're taking this step?

Taylor Giorno, The Hill:

Yeah, so the FTC first announced that it was going to propose a rule basically banning all existing and future noncompete agreements back in January 2023. And they said that they were taking this step because it was under Section 5 of their mandate to basically take action on exploitative or exclusionary practices by businesses.

So, this is the culmination of about a year and a half of and 26,000 public comments, the overwhelming majority of which were very supportive of banning noncompete agreements. And yeah, the FTC took this step this past week, and as you mentioned, business was not happy about it.

John Yang:

And talk about these noncompete agreements. I think people think of them as being executives in finance or high tech, but it's more than that, isn't it?

Taylor Giorno:

At a most basic level, a noncompete agreement is an agreement that prevents a worker from leaving their job to take a job with a competing employer in the industry, or to start a competing business. And a lot of people maybe think of these as something at the C-suite or executive level.

However, a 2019 study by the left-leaning Economic Policy Institute found that about 30 percent of the workers that were covered under these agreements actually made $13 or less per hour. There was a disproportionate number of comments from the healthcare space. This is also set to hit the tech industry, but it's going to hit, honestly, a lot of industries, including the media industry.

John Yang:

How did these become so popular? Why are there so many of these and so many workers covered by them?

Taylor Giorno:

So businesses say that they really started putting these noncompete agreements in place because they wanted to protect trade secrets, which maybe makes especially sense at the executive level. However, particularly post-pandemic, and as the economy has shifted towards a more pro-labor movement, it's been a very effective tool to keep workers in their current position.

And that was also one of the arguments that was cited by the big business groups that sued the FTC to block the rule basically, they're saying, hey, we've invested a lot of work and money in these workers, training them, putting time in on them. We don't want them to go to our competitors and basically use all that training we gave them to compete against us.

John Yang:

What does the FTC and what do employer groups and workers groups say are going to be the practical effects of this?

Taylor Giorno:

The FTC was very clear. This is going to be a very good thing for workers. It's going to allow them to change jobs more freely. It's going to allow them to seek higher pay. I believe when the FTC did its estimates about, they estimate that workers collectively in the United States are going to earn about $300 billion more each year because they're allowed to change jobs. That shakes out to about $525 person.

They also say that it is going to promote competition and entrepreneurship. The FTC estimates that if employers or employees are allowed to leave their jobs and start competing businesses, that they're going to be about 8,500 new businesses started each year.

John Yang:

And then what do the business groups say?

Taylor Giorno:

The business group say, no, this is going to be actually very harmful for competition because it's going to make it harder for us to retain our employees as well as basically make it so that it's going to, maybe there will be people that are going to use our trade secrets to compete against us, particularly in the tech space. This is an issue of concern.

You know, you've got a tech sector group that's a startup that's basically got this new interesting technology. They don't want people leaving and starting a new company with that technology. However, it is worth noting that both the FTC and legal firms have identified there are definitely ways that businesses can get ahead of those. They can have employees signed non-disclosure agreements or confidentiality agreements. Those are not basically banned under this new rule.

John Yang:

President Biden, of course, running for reelection, getting a lot of support from labor. How does this fit in with his overall agenda?

Taylor Giorno:

So unions in particular have been very supportive of this proposal. The AFL-CIO was one of the early backers, as well as anti-monopoly groups in D.C. like the American Economic Liberty Project. And President Biden has really cast himself as the most pro-union, pro-worker president in history.

We saw him last fall on the picket line of the United Auto Workers strike, and this really fits into his messaging as he heads into a very critical reelection year. He can point to both this move made by his administration as well as other efforts that they've made to go after price gouging or basically an imbalance towards the corporations. So this will definitely may not be resolved before the election, but you can expect to hear about it.

John Yang:

You say it may not be resolved before the election. What's the timeline? What's the road ahead?

Taylor Giorno:

So when the FTC voted to pass the rule on Tuesday, they basically set in place a 120-day clock. However, because the Chamber of Commerce and these business groups, as well as a few other groups, have now come out and basically sued the FTC, that sort of extends that timeline while these challenges make their way through the courts.

So unless there is a certification of petition to the Supreme Court, this may drag out past November. The FTC rule stipulates that employers have to reach out to both previous and current employees that are covered by these noncompete agreements to basically let them know that they're null and void. So anybody wondering, hey, when is this going to affect me, you should be hearing from your current or former employer.

John Yang:

And are there state rules governing these?

Taylor Giorno:

Yeah, so that's one of the things that the business groups are saying. They're saying, hey, this is not something that has been traditionally regulated at the federal level, and that is true. There's currently sort of this patchwork system across states.

So there are about three states plus the District of Columbia that currently don't recognize noncompete agreements. And then there are a few more, like Colorado, that basically limit the use of noncompete agreements.

This is much more of a blanket sweeping, no matter what state you're in, this is our federal policy on this. So it'll be a very interesting challenge of federal versus state power to see which way the courts decide to lean.

John Yang:

Taylor Giorno of The Hill, thank you very much.

Taylor Giorno:

Thank you for having me.