The Ban on Noncompete Clauses Was Blocked By a Federal Judge
The Federal Trade Commission (FTC) issued a ban on noncompete clauses for most U.S. workers in April of this year. The ban, which would have prevented employers from putting noncompete clauses into new employment agreements, was thrown out this week by a federal judge in Texas.
The ban would have affected roughly 1 in 5 Americans (roughly 30 million workers) who are currently subject to a noncompete clause, according to the FTC, and would have taken effect in September. However, the April announcement drew pushback almost immediately from organizations such as the U.S. Chamber of Commerce. It said it would sue the FTC over what it called an “unlawful power grab” to overturn noncompetes.
The Goal of the Ban on Noncompete Clauses
A noncompete clause is a “contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends,” according to the FTC. This effectively, as the name implies, prevents you from becoming the employer’s competition.
The clauses can make it hard for workers to find a new job in their field. They can make employees feel trapped in their current role, regardless of whether they’re unhappy in their position or can’t make ends meet with their current salary. Noncompetes can also stifle innovation, as they can prevent employees from launching a side hustle or business in their industry.
The FTC estimated its ban on noncompete clauses would have encouraged new business growth of 2.7% a year in the U.S. and generate 17,000 to 29,000 additional new patents annually. The average worker would make more money ($594 a year) and see their health care costs go down because of the ban.
Opposition of the Ban
Not everyone was thrilled by the idea, however. The initial ruling narrowly passed with a 3-2 vote along party lines: Democratic commissioners voted in favor of the ban while Republican commissioners voted against.
Those who were against the ban claimed it actually would hurt businesses by threatening their intellectual property and making it easier for other companies to poach valuable employees. It was determined that even if the FTC had the authority to ban noncompetes, it hadn’t justified putting in place a sweeping ban of all of them.
What’s Next
The FTC maintains its stance that noncompetes hurt employees, which isn’t surprising. President Joe Biden issued an executive order more than two years earlier telling the FTC to investigate and ultimately put a stop to noncompete clauses in employment contracts. In January of 2023, the FTC proposed this major rule change and left it open to public comment.
The FTC received 26,000 comments — with 25,000 in favor of the change.
However, the ruling means businesses can go back to implementing noncompetes as long as they follow existing guidelines. Also, any individual state rules on noncompetes remain in effect. The FTC said it still plans to address noncompetes through a case-by-case basis and may even appeal the decision.
Contributor Timothy Moore is a writer and editor in Cincinnati who covers banks, loans, insurance, taxes, travel and automotive topics for The Penny Hoarder. Find his work on sites like USA Today, Forbes, Business Insider, Chime, SoFi and LendEDU.
Mackenzie Raetz, The Penny Hoarder’s senior editor of freelance, contributed to this report.
