The Federal Trade Commission (FTC) has passed a new rule that prohibits noncompete agreements for most workers in the United States. The agency claims that such agreements suppress wages and hinder labor market fluidity. The rule, which was proposed over a year ago, was approved by a 3 to 2 vote on Tuesday.

Under the new rule, employers will be unable to enforce clauses that restrict workers from switching jobs within their industry. The FTC has made it illegal for companies to include noncompete agreements in employment contracts. Furthermore, companies with existing noncompete agreements must inform their employees that such agreements are no longer valid. The rule will take effect after 120 days.

Upon its proposal, the rule received an overwhelming response, with more than 26,000 comments submitted to the agency. Scholars who support the ban argue that noncompete agreements not only stifle worker pay and entrepreneurship but also impose costs on companies seeking to hire individuals bound by these agreements. Research suggests that anywhere between 18% to 50% of Americans are subject to noncompete agreements, which are prevalent across various industries, ranging from technology to hairstyling, medicine, and even dance instruction.

The FTC estimates that the ban on noncompete agreements could potentially create job opportunities for 30 million Americans and raise wages by nearly $300 billion annually. Sandeep Vaheesan, the legal director at the Open Markets Institute, commended the FTC's decision, describing it as a "real public service" and establishing a new "gold standard" for policymaking in this area. Vaheesan further emphasized that no employee or professional should be coerced into signing these contracts.

However, business groups, including the U.S. Chamber of Commerce, have voiced opposition to the rule. They argue that noncompete agreements are necessary to safeguard proprietary information and training investments, as well as to prevent employees from immediately moving to competitors. The U.S. Chamber of Commerce has characterized the FTC's rule as a "radical expansion" of the agency's authority and plans to challenge it in court.

While three states - California, North Dakota, and Oklahoma - have long prohibited noncompete agreements, 11 states and Washington, D.C., have recently enacted laws prohibiting these agreements for hourly wage workers or those falling below a salary threshold. However, the inconsistent nature of these bans across different jurisdictions has made enforcement challenging.

Some legal experts suggest that companies still include noncompete clauses in employee contracts, regardless of state prohibitions, as they anticipate workers and competitors to be apprehensive about potential litigation. Nonetheless, supporters of the FTC's rule believe that having a federal mandate will provide legal clarity and send a strong message that these agreements are illegal.

It is important to note that an earlier version of this article incorrectly stated that the rule would take effect after 180 days. The correct information is that the rule will take effect after 120 days, as clarified by the FTC.