The Federal Trade Commission (FTC) issued its final rule banning non-compete agreements for businesses across the country on May 7, 2024. Buried at the bottom of that rule is the estimated impact on wages for Connecticut businesses of $720 per employee, or $945 million statewide, part of the estimated $53.2 billion in total wage increases across the nation, if the rule survives legal challenges already making their way through the court system.

Non-compete agreements are clauses in employee contracts that prevent an employee from leaving a job to work for a competitor within a specific time frame and prevent the sharing of trade secrets with other companies. While the practice is generally thought to apply to high-end corporate jobs, non-compete agreements have come under fire in Connecticut and other states for preventing even low-wage workers from switching jobs.

The Connecticut legislature considered but ultimately did not pass, a limit on non-compete agreements in 2023 that stopped short of a full ban, with carve-outs for specific industries like physicians and home health aides. The legislation was largely supported by Connecticut labor unions, attorneys, and progressive public policy organizations, but opposed by the Connecticut Business and Industry Association (CBIA), insurance companies and accountants.

FTC Chairwoman Lina M. Khan said in a press release that non-compete agreements hurt competition and stifle economic growth.

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” Khan said. “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 cost impact comes largely from increased wages for employees, part of the overall effect of increasing competition across businesses for qualified employees who, previously, may not have had the ability to leave one employer for another within a short time frame. Connecticut’s per-employee wage increase was estimated to be the fifth highest in the United States, behind Washington D.C., Massachusetts, New York, and Washington.

“To the extent other better opportunities with different employers exist for a given worker, their current employers will now be competing with those other employers and may increase worker compensation to keep those workers,” the FTC final rule says.

That wage increase could be seen as a cost or a benefit, but the FTC believes doing away with non-compete agreements will increase innovation with between 17,000 and 29,000 new patents each year, increase new business formations by 8,500 per year, and lower healthcare costs to the tune of $194 billion over the next ten years.

Connecticut Senator Chris Murphy pushed for legislation called the Workforce Mobility Act, which would have limited the use of non-compete agreements in 2023, but the proposed law was referred to the Senate Committee on Health, Education, Labor, and Pensions and hasn’t moved since.

Murphy praised the final FTC rule in a press release, saying, “Non-compete agreements are terrible for workers and our economy – they suppress wages, stifle innovation, and undermine competition,” and calling on Congress to pass the Workforce Mobility Act.

However, the federal rule, which was set to go into effect on September 4, 2023, is already being challenged in court with several lawsuits that may delay implementation of the final rule. The lawsuit contends the FTC acted outside its authority; an issue raised by two FTC commissioners who voted against the final rule.

The final rule was passed with a 3-2 vote, with the opposing FTC commissioners raising concern over an administrative agency essentially acting in place of Congress and making laws.

“We are not a legislature; we are an administrative agency wielding only the power lawfully conferred on us by Congress. Americans cannot vote us out when we get it wrong,” Commissioner Andrew N. Ferguson said. “Thus, whenever we undertake to make rules governing the private conduct of hundreds of millions of people who do not vote for us, we should not begin with determining what the right answer to the policy question is. Rather, we must first assure ourselves of the power to answer the question at all.” 

Diane Mokriski, human resource counsel at CBIA, says it remains to be seen if the final rule will survive the legal challenges filed in Texas, which could make their way to the U.S. Supreme Court, or whether the ban on non-competes will actually affect wages. 

“The FTC was using economic studies that have been challenged by several groups,” Mokriski said. “I think they selectively decided to rely on some economic studies and not rely on others, and so that helped them come to the conclusion that wages would increase.”

“There’s a lot of unknowns right now,” Mokriski continued. “But CBIA’s position is consistent with the U.S. Chamber of Commerce, which is that it was completely an overreach in their authority. Since the FTC has been around, they’ve never tried to enact legislation in this way. They’re empowered to enforce existing anti-trust laws, but those laws are passed by Congress.”

If or when the final rule goes into effect, non-compete agreements would be immediately banned for most employees. Senior executives who already have an existing non-compete agreement would be grandfathered in, but no new non-compete agreements can be required. 

According to the rule, senior executives – defined as officers who set company policy and are paid at least $151,164 – are “less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers,” and concerns over “the practical effects of extinguishing existing non-competes.”

All other workers will have to be notified by their employers that their existing non-compete clauses and contracts are no longer enforceable. According to the FTC, employers can still use non-disclosure agreements to protect trade secrets and proprietary information.

The FTC wrote that noncompete agreements – which they estimate apply to 1 in 5 employees – “are a widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business.”

“That issue as to whether the ban will actually go into effect is probably a ways away,” Mokriski said. “It’ll be a while.”

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