FTC Issues Final Rule that bans Employers from mandating Noncompete agreements from Employees

By N.A. Pagliara, Esquire of Pagliara Law Group, P.A. posted in Employment Law Blog on April 24, 2024.

The Federal Trade Commission announced a final rule to foster competition by banning noncompetes nationally. This will protect the freedom of workers to change jobs, increasing innovation, and fostering 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. Americans will now have the liberty to look for a new job, start a new business, or bring a new idea to fruition.

• Under the final Noncompete Rule, the FTC adopts a comprehensive ban on new noncompetes with all workers, including senior executives.
  • The final rule provides that it is an unfair method of competition—and therefore a violation of Section 5—for employers to enter into noncompetes with workers.
  • Note: The regulation’s effective date is 120 days after Federal Register publication – not after the FTC’s public announcement.
• For existing noncompetes, the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing noncompetes can remain in force. Existing noncompetes with workers other than senior executives are not enforceable after the effective date.
  • Fewer than 1% of workers are estimated to be senior executives under the final rule.
  • Specifically, the final rule defines the term “senior executive” to refer to workers earning more than $151,164 who are in a “policy-making position.”
• The FTC estimates that banning noncompetes will result in:
  • Reduced health care costs: $74-194 billion in reduced spending on physician services over the next decade.
  • New business formation: 2.7% increase in the rate of new firm formation, resulting in an additional 8,500 new businesses created each year.
  • Rise in innovation: an average of 17,000-29,000 more patents each year.
    • This reflects an estimated increase of about 3,000 to 5,000 new patents in the first year noncompetes are banned, rising to about 30,000-53,000 in the tenth year.
    • This represents an estimated increase of 11-19% annually over a ten-year period.
  • Higher worker earnings: $400-$488 billion in increased wages for workers over the next decade.
    • The average worker’s earnings will rise an estimated extra $524 per year.
    • The final rule will become effective 120 days after publication in the Federal Register.

Noncompete agreements are contracts that prevent workers from taking a new job or starting a new business, often placing heavy restrictions on their career mobility. These contracts can force employees to either stay in jobs they wish to leave or endure significant hardships, like switching to a lower-paying field, relocating, leaving the workforce, or facing costly legal battles. Nearly 30 million workers, or one in five Americans, are bound by these agreements.

The Federal Trade Commission (FTC) has issued a new rule that renders most existing noncompetes unenforceable after a certain date, with exceptions for senior executives, who make up less than 0.75% of the workforce. Employers will be banned from creating or enforcing new noncompetes, even for senior executives. Employers must also inform workers who are bound by existing noncompetes that these agreements will no longer be enforced against them.

In January 2023, the FTC proposed a rule to ban noncompetes, with a 90-day public comment period. The FTC received over 26,000 comments, with the majority supporting the proposed ban. These comments were used to refine the final rule, with the FTC carefully reviewing each response and adjusting the rule accordingly.

The final rule declares that noncompetes are an unfair competition practice, violating Section 5 of the FTC Act. The FTC found that noncompetes harm labor markets by limiting efficient job matching between workers and employers. They also hinder product and service markets by discouraging new business creation and innovation. Moreover, noncompetes may lead to increased market concentration and higher consumer prices.

To protect their interests, employers have alternatives to noncompetes, such as trade secret laws and non-disclosure agreements (NDAs), which provide safeguards for proprietary information. The FTC suggests that employers looking to retain employees could focus on improving wages and working conditions rather than using restrictive noncompetes.

The final rule allows existing noncompetes for senior executives to remain, but bans new ones. Senior executives are defined as those earning more than $151,164 annually and holding policy-making roles. Employers are not required to legally rescind existing noncompetes but must notify workers that the agreements will not be enforced.

The FTC has included a model notice for employers to use when informing workers about the unenforceability of noncompetes. The final rule was approved by a 3-2 vote from the Commission, with some commissioners issuing separate statements. The rule will take effect 120 days after publication in the Federal Register.

Source: FTC

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AUTHOR: Nicholas A. Pagliara, Esq. Founder, Chairman of the Board and Managing Attorney of Pagliara Law Group, PA.

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Tags and Topics: Employment Law, Noncompetes, Competition, Employee rights. See our Labor and Employment Law practice group.