The FTC banned noncompetes. What that means for workers and companies.

The Federal Trade Commission has banned noncompete agreements for most of the U.S. workforce, freeing an estimated 30 million people bound by contracts that limit their ability to change jobs within their industry or strike out on their own.

Labor advocates cheered Tuesday’s decision as a huge victory for workers, arguing that such agreements smother competition and hinder Americans’ earning powers. “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,” FTC Chair Lina M. Khan said in a statement after the panel’s 3-2 vote.

But the rule change has sparked a legal showdown with the U.S. Chamber of Commerce, big businesses and lobbying groups, which contend in a federal lawsuit filed Wednesday that it will limit their ability to protect trade secrets and other confidential information.

Here’s what you need to know about noncompetes:

What are noncompete agreements?

Noncompete agreements - which restrict a worker’s ability to switch employers within their industry - have been standard practice for decades. Roughly 1 in 5 U.S. workers operate under noncompetes, the FTC estimates, from hourly workers to CEOs. These measures are particularly common in industries such as technology, sales, finance and health care, as well as hairstyling, fitness and broadcast media.

“These contracts and noncompetes were developed in the first place to prevent employees from easily switching to rival firms, or to new positions,” Michelle Hay, global chief people officer at the business solutions company Sedgwick, told The Post, adding that “noncompetes have been governed on a state-by-state basis for more than 200 years.”

The language in these contracts can be used to prevent an employee from going to work for a competitor, or starting a competing business, “typically within a certain geographic area and period of time after the worker’s employment ends,” the FTC notes.

Why did the FTC ban them?

The FTC contends that noncompete clauses ultimately decrease competition by preventing workers from pursuing opportunities within the same industry and “lower wages for both workers who are subject to them as well as workers who are not.”

“Noncompete clauses also prevent new businesses from forming, stifling entrepreneurship, and prevent novel innovation which would otherwise occur when workers are able to broadly share their ideas,” the regulatory agency says on its website.

Doing away with noncompetes would increase business formation across the country by 2.7 percent, or 8,500 additional businesses each year, the FTC projects. The regulator also expects that the final rule will increase earnings for the average worker by $524 per year and lower health-care costs by as much as $194 billion over the next decade.

The origins of the ban trace to 2021, when President Biden ordered the agency to curtail the use of noncompete agreements as part of an executive order meant to promote competition in the U.S. economy.

The ban, which is the latest step in a major effort by the FTC to expand the boundaries of antitrust enforcement, is set to take effect in 120 days. But it could face disruption from legal challenges, which already are underway.

How does this change things for workers?

The ban would void existing noncompete agreements and broadly bar them in the future, allowing workers to “pursue better opportunities, shake up the market and push megacorporations towards fair practices,” said Liz Zelnick, director of the economic security and corporate power program at Accountable US, a nonpartisan government watchdog.

“Noncompete clauses force employees to endure low wages and poor working conditions,” Zelnick said in comments emailed to The Washington Post.

Although they are extremely common, such agreements are “very unpopular and very difficult to deal with” for workers, according to Peter Rahbar, a New York-based employment lawyer. He noted that the rule received overwhelming support from workers and labor advocates, with roughly 25,000 of the 26,000 public comments received by the FTC coming from those in support of a ban.

In the past decade, he noted, growing attention has been paid to the noncompetes being used on low-income workers, like at sandwich maker Jimmy John’s.

“They’re very scary for the individual no matter how highly compensated they are,” Rahbar said.

How will employers be affected?

Emily Dickens, chief of staff and head of government affairs at the Society for Human Resource Management, said blanket bans on noncompete agreements “pose significant challenges for HR professionals tasked with safeguarding their employers’ intellectual property and preventing unfair competition.”

“We recognize and appreciate the FTC’s commitment to advancing worker mobility. However, we firmly believe that this objective can be achieved without disregarding employers’ rights to protect their investments in training and intellectual property,” Dickens said Tuesday in a statement.

The biggest employers will be the most affected, “but even they’ve been bracing for this reality for a long time,” said Chambord Benton-Hayes, an employment lawyer based in Oakland, Calif.

While some companies have concerns that a noncompete ban would make their trade secrets and other proprietary information vulnerable to exposure, most of them “also have nondisclosure agreements and confidentiality clauses, which should give them all the protection they need on that front,” Benton-Hayes said in comments emailed to The Post.

The ban would give employers incentive to “expand the development and training offered to employees, to provide more comprehensive benefits packages, and to create a workplace environment that promotes long-term employment with a company,” Benton-Hayes said. “In addition, employers will have to be more creative with compensation for retention purposes.”

Is the ban final, or will it face challenges?

The rule change is already facing pushback, which could halt its implementation. On Wednesday, the U.S. Chamber of Commerce and other business groups sued the FTC in federal court in the Eastern District of Texas. They are asking the court to issue an injunction to prevent the rule from taking effect, arguing that the FTC’s decision “breaks with centuries of state and federal law and rests on novel claims of authority by the Commission,” according to the lawsuit.

Whether the FTC has the authority to make this rule “is going to be the central point of challenge,” according to Rahbar. That lawsuit and future challenges will probably hinge on whether the agency can legally force such a broad change on an issue Congress did not direct the regulator to take up, he said.

“Over the past few years, there have been significant challenges to administrative agencies and the scope of their powers to make rules and regulations in areas where Congress hasn’t instructed them to do so,” Rahbar said. “Traditionally, there’s been a lot of deference to agency rulemaking authority.”

Gregory Brown, a commercial litigation lawyer with Hill Ward Henderson, said the rule creates a landscape of uncertainty for employers and employees, given how broad the language is and how the FTC is exercising its power.

“There will be direct challenges to this rule, constitutional challenges and some challenges about the FTC’s authority,” Brown said. “I think chaos ensues from here.”