Biden administration bans noncompete agreements, setting up legal showdown with business groups

The Biden administration has issued a nationwide ban on the ability of employers to make their workers sign noncompete agreements, a move regulators said would help boost employee pay but which is set to be challenged in court by business groups.

In a ruling Tuesday afternoon, the Federal Trade Commission (FTC) said noncompete clauses would henceforth be illegal. The measure was necessary, it said, for ‘protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.’

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism,” said FTC chair Lina M. Khan in a statement. “The FTC’s final rule to ban noncompetes 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 nearly one in five Americans are subject to noncompetes. They have grown increasingly common in lower wage or hourly work industries like fast food franchises, restaurants, and security firms, where some employers have sought to limit the ability of workers to effectively raise their pay by looking for work at competing establishments.

In addition to banning all new noncompetes, the FTC’s rule applies to all existing noncompete agreements. Employers will now have to provide notice to workers bound to a current noncompete that it will not be enforced against them.

The rule was hailed by labor groups and left-leaning policy experts.

‘Noncompetes are about reducing competition, full stop. It’s in their name,’ said Heidi Shierholz, president of the progressive nonprofit Economic Policy Institute. ‘Noncompetes are bad for workers, bad for consumers, and bad for the broader economy. This rule is an important step in creating an economy that is not only strong but also works for working people.’

The AFL-CIO, America’s largest labor group, praised the new rule in a post on X Tuesday, saying noncompete agreements ‘trap workers from finding better jobs, drive down wages, and stifle competition.’

But business groups are already hitting out at the ban, saying noncompetes are essential to protecting trade secrets and proprietary information. The groups also say noncompetes ultimately help workers by engendering a more collaborative firm environment and limiting so-called ‘free riders,’ or employees who seek to capitalize on a specific company’s methods and taking that knowledge elsewhere.

The U.S. Chamber of Commerce, the country’s largest business lobby, said it plans to sue the FTC over the ruling. In a statement, it called the ban an ‘unlawful power grab.’

“This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy,’ it said. 

Separately. a Dallas-based tax services firm filed a lawsuit in Texas federal court — which has proven hostile to Biden administration rulings — challenging not only the ban but the very structure of the FTC itself.

‘We stand firm in our commitment to serve the rightful interest of every company to retain its proprietary formulas for success taught in good faith to its own employees,” said chairman and CEO G. Brint Ryan said in a statement.

The FTC’s rule is set to go into effect in August, but is unlikely to be enforced until the court challenges are resolved, something that could take years.