On April 23, the Federal Trade Commission issued a final rule to promote competition by banning noncompete clauses across the nation. According to the FTC, this will protect the fundamental freedom of workers to change jobs, increase innovation and foster new business formation.
“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 describes noncompetes as a widespread, “often exploitative” practice that imposes contractual conditions to prevent workers from taking a new job or starting a new practice. Because of this, noncompetes often force workers to stay in a job they want to leave or bear other significant harms or costs.
An estimated 30 million workers—nearly one in five Americans—are subject to a noncompete, the commission reports. Under the new rule, existing noncompetes for most workers will no longer be enforceable after the rule’s effective date.
However, existing noncompetes for senior executives (approximately less than 0.75% of workers) can remain in force, according to the FTC. Senior executives are defined as workers who are in policy-making positions and earn more than $151,164 annually.
That said, employers are also banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers will also be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompetes against them.
Additionally, the commission has eliminated a provision in the proposed rule that would have required employers to legally modify existing noncompetes by formally rescinding them. That change will reportedly help to streamline compliance.
The commission estimates that the final rule will lead to new business formation growing by 2.7% each year, resulting in more than 8,500 new businesses created. Additionally, it is expected to result in higher earnings for workers, estimating $524 in increased earnings for the average worker per year and lowering health care costs by up to $194 billion over the next decade.
The final rule is also 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.
The FTC proposed the rule in January 2023, followed by a 90-day public comment period in which they received more than 26,000 comments on the proposed rule. With over 25,000 comments in support of the ban, the commission notes these comments informed the final rulemaking process in response to public feedback.
The commission consequently determined that it is an unfair method of competition and, therefore, a violation of Section 5 of the FTC Act. Additionally, they found that noncompetes tend to negatively affect competitive conditions in labor markets, as well as product and service markets. There was also reportedly evidence that noncompetes lead to increased market concentration and higher prices for consumers.
The final rule will become effective 120 days after publication in The Federal Register.
The commission adds that employers have several alternatives to noncompetes that still enable firms to protect their investments. According to the FTC, trade secret laws and non-disclosure agreements (NDAs) can provide means to protect proprietary and other sensitive information. Researchers reportedly estimate that over 95% of workers with a noncompete already have an NDA.
Instead of noncompetes, the commission also found that if employers wish to retain employees, they can compete on the merits for the worker’s labor services by improving wages and working conditions.
