The Federal Trade Commission (FTC) has issued a final rule to promote competition by banning noncompete agreements nationwide, which it said will protect the freedom of workers to change jobs. The U.S. Chamber of Commerce says it will sue to block the rule.
The FTC estimates that 30 million workers—nearly one in five Americans—are subject to a noncompete.
“Noncompete clauses keep wages low, suppress new ideasand 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 said it expects the final rule to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year and expects it to lower health care costs by up to $194 billion over the next decade. The commission also estimates that it will lead to new business formation growing by 2.7% per year, resulting in more than 8,500 additional new businesses created each year and lead to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years.
Noncompetes are a widespread and often “exploitative” practice imposing contractual conditions that prevent workers from taking a new job or starting a new business, according to the FTC. 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, the commission said.
Under the FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date, it said. Existing noncompetes for senior executives, who represent less than 0.75% of workers, can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions.
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.
In January 2023, the FTC issued a proposed rule which was subject to a 90-day public comment period. The FTC received more than 26,000 comments on the proposed rule, with more than 25,000 comments in support of the FTC’s proposed ban on noncompetes. In the final rule, the commission has determined that it is an unfair method of competition, and therefore a violation of Section 5 of the FTC Act for employers to enter into noncompetes with workers and to enforce certain noncompetes.
The commission found that noncompetes “tend to negatively affect competitive conditions in labor markets by inhibiting efficient matching between workers and employers.” It also found that noncompetes “tend to negatively affect competitive conditions in product and service markets.” There is also evidence that noncompetes lead to increased market concentration and higher prices for consumers, it said.
The FTC found that 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 (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information. Researchers estimate that more than 95% of workers with a noncompete already have an NDA.
The commission 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.
The FTC eliminated a provision in the proposed rule that would have required employers to legally modify existing noncompetes by formally rescinding them. That change will help to streamline compliance, it said.
Instead, under the final rule, employers will 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 final rule will become effective 120 days after publication in the Federal Register.
“The [FTC’s] decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive,” said U.S. Chamber of Commerce President and CEO Suzanne Clark in a statement.
“Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules. Noncompete agreements are either upheld or dismissed under well-established state laws governing their use. Yet, today, three unelected commissioners have unilaterally decided they have the authority to declare what’s a legitimate business decision and what’s not by moving to ban noncompete agreements in all sectors of the economy. This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy.”
It added, “The chamber will sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked.”
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