The Federal Trade Commission issued a final rule on Tuesday to ban noncompetes nationwide in an effort to give workers more freedom to change jobs. An estimated 30 million workers, nearly one in five Americans, are subject to a noncompete clause in their employment terms.
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.
The final rule will become effective 120 days after publication in the Federal Register.
Noncompetes are an exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business, usually within a certain timeframe after they leave their current job.
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, according to the FTC.
“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 final rule is expected to result in higher earnings for workers and the potential for more new businesses and patents.
The temporary exception
Existing noncompetes for senior executives – who represent less than 0.75 percent 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.
Behind the ruling
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 25,000 comments in support of the FTC’s proposed ban on noncompetes.
The comments informed the FTC’s final rulemaking process, with the FTC carefully reviewing each comment and making changes to the proposed rule in response to the public’s feedback.
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 FTC said employers have alternatives to noncompetes including NDAs.
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Crystal Graham
