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New federal rule would bar companies from forcing ‘noncompete’ agreements on employees

U.S. companies would no longer be able to bar employees from taking jobs with competitors under a rule approved by a federal agency, though the rule is sure to be challenged in court.

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The Federal Trade Commission on Tuesday banned noncompete agreements for most U.S. workers with a new rule that will bar employers from enforcing clauses that restrict workers from switching employers within their industry, which the agency said suppresses wages and gums up labor markets.

The FTC voted 3 to 2 Tuesday to issue the rule it proposed more than a year ago. The new rule makes it illegal for employers to include the agreements in employment contracts and requires companies with active noncompete agreements to inform workers that they are void.

The agency received more than 26,000 comments about the rule after it was proposed some 16 months ago. The rule will take effect after 120 days, although business groups have promised to challenge it in court, which could delay implementation.

Scholars cite a body of research that shows the agreements suppress worker pay and entrepreneurship while also imposing costs on firms wanting to hire workers bound by the agreements. A Labor Department study published in June 2022 estimated that 18% of Americans are bound by noncompete agreements, while other research suggests it could be closer to 5o%. They are used in a wide range of industries, including technology, hairstyling, medicine and even dance instruction, while imposing restrictions on both high- and low-wage earners.

The FTC estimates that banning noncompete agreements could create jobs for 30 million Americans and raise wages by nearly $300 billion per year.

“I think the FTC has done a real public service here by compiling all this evidence, making a really strong case for a complete ban and establishing a new gold standard for policymaking in this area,” said Sandeep Vaheesan, legal director at the Open Markets Institute, which proposed a noncompete ban to the agency in 2019. “No employee or professional should be made to sign one of these contracts.”

Business groups opposed to the rule, such as the U.S. Chamber of Commerce, have said that the contracts are necessary to protect proprietary information and training, and justify investing in workers who might otherwise immediately jump to a competitor. The Chamber has argued the rule represents a “radical expansion” of the FTC’s authority and has vowed the challenge the rule in court.

Noncompete agreements have been prohibited in three states – California, North Dakota and Oklahoma – for more than a century. In recent years, 11 states and Washington, D.C., have passed laws that prohibit the agreements for hourly wage workers or those who fall below a salary threshold.

In Maine this month, Gov. Janet Mills used her first veto of the year to block a bill that would have limited the use of contract clauses that prohibit a former employee from competing with a previous employer.

Mills said she vetoed L.D. 1496 because the Labor and Housing Committee failed to prove that noncompete agreements are a problem and the sponsor, Rep. Sophia Warren, D-Scarborough, did not try to address the governor’s concerns.

It takes a two-thirds vote of the Legislature to overturn a gubernatorial veto. The House vote in support of an override was 74-72, well short of the number needed.

The patchwork nature of the legal landscape has made bans difficult to enforce. Some legal experts said that companies include noncompete clauses in employee contracts regardless of state prohibitions, knowing workers and competitors will be wary of litigation.

Some observers fear that employers will also find workarounds to the FTC rule, but Vaheesan said that a federal rule will provide legal clarity and send a strong message.

“It establishes, in the place of this mushy standard that exists in most states, a bright line,” he said. “So everyone will know these contracts are illegal.”

This report contains material from the Portland Press Herald/Maine Sunday Telegram.

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