The Federal Trade Commission (FTC) has issued a final rule that bans noncompete clauses covering employees nationwide. Let’s dive into the key points:

What Are Noncompete Clauses?

Noncompete clauses are contractual conditions that prevent workers from taking a new job or starting a new business if it competes with the current or prior employer. Approximately 30 million American workers—nearly one in five—are subject to noncompete agreements.

The FTC’s Rationale for Banning Noncompetes:

The FTC has determined that employee non-compete clauses keep wages low by keeping employees in static jobs, suppresses innovation by creating barriers to collaboration, and hinders business dynamism throughout the country.

By banning noncompetes, the FTC aims to:

• Increase Innovation: The final rule is expected to lead to an average increase of 17,000 to 29,000 more patents each year for the next decade.
• Boost New Business Formation: The FTC estimates that new business formation will grow by 2.7% annually, resulting in over 8,500 additional startups each year.
• Raise Worker Wages: Estimated earnings for the average worker should increase by an additional $524 per year.
• Lower Health Care Costs: The rule is expected to reduce health care costs by up to $194 billion over the next decade by promoting competition generally.

Who Is Affected?

Existing noncompetes for the vast majority of employees will no longer be enforceable after the rule’s effective date. Senior executives (representing less than 0.75% of workers) can still have existing noncompetes enforced, but employers cannot enter into new noncompetes with them.

Employers must provide notice to workers (other than senior executives) bound by existing noncompetes that those agreements will not be enforced.

Noncompetes can still be used for independent contractors and in purchase and sale agreements, so long as they are still reasonable and compliant with state law. The rule is primarily aimed at for-profit companies, but also permits some limited use between franchisees and franchisors.

Conclusion:

The rule was passed by a vote of 3-2, basically along partisan lines. The U.S. Chamber of Commerce has vowed to challenge the rule in court, perhaps as early as the end of this month. The rule will go into effect 120 days after it is published in the federal register, so it will be imperative to see if the rule is enjoined from being published or if it gets published while litigation proceeds.

Either way, it is time to start preparing notices and getting ready for a new regime. This change will likely happen one way or another.

Reference: https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes.