The Federal Trade Commission issued a final rule on April 23 banning noncompetes nationwide. According to the press release, the new rule protects the fundamental freedom of workers to change jobs, increases innovation and fosters 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 Khan in a press release. “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 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 FTC also estimates earnings for the average worker growing by an additional $524 per year and leading to an average increase of 17,000 to 29,000 more patents each year for the next 10 years under the final rule.
Under the new rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date. Existing noncompetes for senior executives can remain in force under the new rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers will 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.
The FTC proposed the rule in January 2023 and received more than 26,000 comments, with over 25,000 comments in support of the proposed ban on noncompetes, according to the press release.
In the final rule, the FTC determined noncompetes were an unfair method of competition and a violation of Section 5 of the Federal Trade Commission Act.
Alternatives to Noncompetes
The FTC found employers have several alternatives to noncompetes that still enable firms to protect their investments without having to enforce a noncompete.
Trade secret laws and non-disclosure agreements both provide employers with well established means to protect proprietary and other sensitive information. Researchers estimate over 95% of workers with a noncompete already have an NDA, according to the report.
According to the report, the FTC also found that instead of using noncompetes to lock in workers, employers that wish to retain employees can compete on the merits for the worker’s labor services by improving wages and working conditions.
Changes from the Notice of Proposed Rulemaking
The final rule defines senior executives as workers earning more than $151,164 annually and who are involved in policy-making decisions.
The commission also eliminated a provision in the proposed rule that would’ve required employers to legally modify existing noncompetes by formally rescinding them. Instead, employers will simply have to provide notice to workers bound to an existing noncompete that the noncompete agreement will not be enforced against them in the future.
The FTC included model language in the final rule employers can use to communicate with workers.
The vote to approve the issuance of the final rule was 3-2, with commissioners Melissa Holyoak and Andrew Ferguson voting no. The final rule will become effective 120 days after publication in the Federal Register.