The FTC Announces New Rule Banning Noncompete Agreements

by David Smith, CAE, Vice President, Compensation Services
Published April 29, 2024

The Federal Trade Commission (FTC), with a vote to approve the issuance of the final rule being 3-2 with Commissioners Melissa Holyoak and Andrew N. Ferguson voting no, issued a final rule Tuesday, April 23, 2024 it says will promote competition by banning noncompete agreements nationwide and allowing workers to change jobs, including positions with competitors. FTC officials believe banning the creation of ALL new noncompetes (allowing only existing agreements with Senior Executives to remain enforceable) will increase innovation and foster 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 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 being created each year. The final rule is expected to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and it is expected to lower health care costs by up to $194 billion over the next decade. The final rule is also expected 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 according to the Agency.

In a press release announcing the decision, FTC officials said noncompetes are a “widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business,” further stating that they 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. An estimated 30 million workers—nearly one in five Americans—are currently subject to a noncompete.

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 (120 days after it is published in the Federal Register). Existing noncompetes for senior executives (workers earning more than $151,164 annually and who are in policy-making positions) – 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. 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 eliminated a provision in the proposed rule that would have required employers to legally modify existing noncompetes by formally rescinding them after receiving comments during that phase of the rule making process (a change made to help streamline compliance). Under the final rule, 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.

Alternatives to Noncompetes

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.

In its rulings, the Commission stated that instead of using noncompetes to lock in workers, employers wishing to retain employees should compete on the merits for the worker’s labor services by improving wages and working conditions.

The Employers’ Association is here to help you remain compliant with the ever-changing regulations that exist within our employment sector. Please contact us at [email protected] or call us at 616.698.1167 if you have any questions about this business-altering change.