The FTC prohibits the majority of employers from implementing noncompete clauses, bringing a sense of relief to workers who were previously bound by such agreements

After careful consideration, the Commission has concluded that it is unjust and against fair competition for employers to engage in noncompetes with their employees. This violates Section 5 of the FTC Act.

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The Federal Trade Commission has just announced a new rule that will boost competition by prohibiting noncompete agreements across the country. This move aims to safeguard workers' rights to switch jobs freely, encourage innovation, and stimulate the creation of new businesses.

“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,” said FTC Chair Lina M. Khan. “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 that the final rule banning noncompetes will lead to new business formation growing by 2.7% per year, resulting in more than 8,500 additional new businesses created each year. The final rule is expected to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and it is expected to lower health care costs by up to $194 billion over the next decade. In addition, the final rule is expected to help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years under the final rule.

Noncompete agreements are a common and sometimes unfair practice that places restrictions on employees, preventing them from pursuing new job opportunities or launching their own businesses. These agreements can trap workers in undesirable positions or result in various negative consequences, like having to accept lower-paying jobs, moving to a new location, exiting the workforce entirely, or dealing with costly legal battles. It's estimated that around 30 million workers, which is almost one-fifth of the American population, are bound by noncompete agreements.

The FTC's latest rule brings good news for the majority of workers. After the rule takes effect, existing noncompetes will no longer hold any power. However, for senior executives, who make up less than 0.75% of the workforce, their existing noncompetes can still be enforced. It's important to note that employers are strictly prohibited from entering into new noncompetes or attempting to enforce them, even for senior executives. Additionally, employers must inform workers, excluding senior executives, who are bound by existing noncompetes that these agreements will no longer be enforced against them.

January 2023 saw the FTC unveil a proposed rule that underwent a 90-day public comment period. The response was significant, with more than 26,000 comments received, the vast majority of which, over 25,000, supported the FTC's move to ban noncompete agreements. These comments were pivotal in shaping the final rule, as the FTC meticulously reviewed and adjusted the proposed regulation based on the feedback provided by the public.

After careful consideration, the Commission has concluded that it is unjust and against fair competition for employers to engage in noncompetes with their employees. This violates Section 5 of the FTC Act. The Commission's research reveals that noncompetes have a detrimental impact on the labor market, hindering the efficient pairing of workers and employers.

Furthermore, noncompetes also negatively affect product and service markets, impeding the formation of new businesses and stifling innovation. Additionally, there is evidence suggesting that noncompetes contribute to market concentration and result in higher prices for consumers.

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Employers now have a variety of choices at their disposal, thanks to the Commission's findings. These alternatives provide a means for firms to protect their investments without the need for enforcing noncompete agreements.

Trade secret laws and non-disclosure agreements (NDAs) are powerful tools that employers can utilize to safeguard their valuable proprietary information and other sensitive data. It is interesting to note that a significant majority, approximately 95%, of employees who are bound by noncompete agreements also have NDAs in place. Moreover, the Commission has discovered an alternative approach for employers who aim to retain their workforce without resorting to noncompetes. Instead of restricting employees, they can choose to compete fairly by enhancing wages and improving working conditions, thereby attracting and retaining talented individuals based on the merits of their labor services.

The final rule permits the continuation of current noncompete agreements for senior executives, while prohibiting employers from initiating or enforcing new noncompetes with senior executives. Senior executives are described as employees who earn over $151,164 per year and hold policy-making positions. Additionally, the Commission has removed a requirement from the proposed rule that would have mandated employers to formally revoke existing noncompetes, aiming to simplify compliance procedures.

The final rule mandates that employers must notify employees under a noncompete agreement that the agreement will no longer be enforced, instead of actually enforcing it. To assist employers in meeting this obligation, the Commission has included template language in the final rule for communication with employees

Anticipated by employment lawyers, employers and business groups are likely to resist the new rule, leading to potential delays in its enforcement as it faces legal challenges in court. In fact, if those who are suing the FTC emerge victorious, there is a possibility that the rule may never come into effect at all.

(CNN) Daryl Joseffer, chief counsel of the U.S. Chamber’s Litigation Center, characterized the FTC rule banning noncompetes as an “administrative power grab.” “They’re trying to regulate a century-old business practice across the entire economy,” Joseffer said.

If the rule is allowed to stand, it opens “a pandora’s box, where they can micromanage any aspect of the economy,” the Chamber’s chief policy officer, Neil Bradley, asserted.

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