On Tuesday, April 23, 2024, the Federal Trade Commission ("FTC") issued a final rule designed to promote competition by banning noncompetes nationwide, which it claimed will protect the fundamental 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. "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 30 million workers—nearly one in five Americans—are subject to a noncompete. The FTC projects 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 predicts the final rule will result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and will lower health care costs by up to $194 billion over the next decade. In addition, the FTC expects the final rule 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 under the final rule.
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. Existing noncompetes for "senior executives" 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.
The Commission 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 over 95% of workers with a noncompete already have an NDA.
Business groups are expected to challenge the FTC's new rule in court, which could delay its implementation.
