The Federal Trade Commission (FTC) on Tuesday issued a final rule banning noncompete clauses in most employment contracts in the U.S. This is a significant move that will have a major impact on workers and businesses alike.
Under the FTC’s new rule, existing noncompete agreements for the “vast majority” of workers will no longer be enforceable. This means that workers will be free to leave their jobs and take new positions with competing companies without fear of legal repercussions.
There are a few exceptions to the new rule. Existing noncompetes for employees deemed to be senior executives — who represent less than 0.75% of workers, according to the agency — can remain in force. However, employers will be prohibited from entering into or attempting to enforce any new noncompetes, even if they involve senior executives.
The FTC estimates that some 30 million U.S. workers, nearly one in five Americans, are subject to a noncompete. The agency argues that these clauses stifle competition, suppress innovation, and harm workers.
“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,” FTC chair Lina Khan said in a statement. “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’s vote to approve the issuance of the final rule was 3-2. The three Democratic commissioners (Khan, Rebecca Kelly Slaughter and Alvaro Bedoya) voted yes; the two Republican commissioners (Melissa Holyoak and Andrew Ferguson) voted no.
Employment experts said the FTC rule banning noncompetes will be challenged.
“Everybody can take a breath, as the FTC vote may not impact business today or even tomorrow, because we expect legal challenges that delay implementation,” said Heather Weine Brochin, chair of the employment and labor practice at law firm Day Pitney. “From a practical perspective, this is not the final say — employers do not need to shred their noncompetes. We could still be talking about this, and continue to remain uncertain about the future of noncompetes, in a month or even after the presidential election.”
Keith Wilkes, a partner at law firm Hall Estill and a labor and employment legal expert, also anticipates a legal challenge to the FTC decision.
“Regardless of this partisan administrative decision, we suspect that a lawsuit will be quickly filed in federal court — in most likely a conservative jurisdiction — seeking an immediate stay of the implementation of the noncompete ban until the federal courts weigh in and ultimately decide its fate,” Wilkes said.
TechFreedom — which describes itself as a nonprofit, nonpartisan technology policy think tank — has asserted that the FTC lacks the authority to issue a ban on noncompete agreement (or any other major rules governing unfair methods of competition).
“No one can seriously expect this Supreme Court to uphold the FTCʼs interpretation” of its ability to institute a ban of noncompetes under the FTC Act, according to TechFreedom president Berin Szóka. The commission’s reading of the statute “assumes that Congress delegated vast lawmaking powers to the FTC without clear limiting principles.”
In the final rule, the FTC determined that noncompete clauses are an unfair method of competition, and therefore a violation of Section 5 of the FTC Act. The commission said employers have several alternatives to noncompetes that still “enable firms to protect their investments without having to enforce a noncompete.”
The FTC cited trade secret laws and non-disclosure agreements (NDAs) as both providing employers with “well-established means to protect proprietary and other sensitive information.” The agency also cited research estimating that over 95% of workers with a noncompete already have an NDA.
According to the FTC’s announcement about the new rule, noncompete clauses are “a widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business.” Noncompetes often force workers to either stay in a job they want to leave or bear other significant harms and costs, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave the workforce altogether, or being forced to defend against expensive litigation, according to the agency.
The FTC estimated 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 agency also said it expects the rule to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and to lower health care costs by up to $194 billion over the next decade.
