The Federal Trade Commission (FTC) recently took a significant step towards empowering workers by issuing a final rule that effectively bans noncompete clauses across the United States.
FTC Chair Lina M. Khan highlighted the detrimental effects of noncompete agreements, emphasizing that they suppress wages, stifle the emergence of new ideas, and impede the dynamism of the American economy. The FTC's final rule seeks to dismantle these barriers by ensuring that people have the freedom to pursue alternative employment opportunities, launch new ventures, or introduce innovative concepts to the market.
The FTC anticipates the rule will positively impact the economy in numerous ways:
New Business Formation
The FTC estimates that the ban on noncompetes will lead to a 2.7% annual increase in the rate of new business formation, which equates to over 8,500 additional new businesses each year.
Higher Worker Earnings
The rule is anticipated to result in higher earnings for workers, with a total of $400–$488 billion in increased wages over the next decade. The FTC projects the average employee will earn an additional $524 per year.
Lower Healthcare Costs
The ban on noncompetes is expected to reduce healthcare costs by up to $194 billion over the next decade as well.
Increased Innovation
The FTC predicts a substantial uptick in innovation, with an estimated average of 17,000 to 29,000 more patents filed annually over the next decade.
Terms of the Final Rule
The FTC's final rule effectively renders existing noncompete agreements unenforceable for the vast majority of workers, while exempting senior executives. However, employers are prohibited from entering into new noncompetes, regardless of the employee's position.
To safeguard proprietary information without resorting to noncompetes, the FTC recommends alternative measures such as trade secret laws and non-disclosure agreements (NDAs). These mechanisms offer employers effective means of protecting sensitive information while preserving workers' mobility and flexibility.
The decision to enact this final rule followed a comprehensive review process, which included a 90-day public comment period. Feedback from the public informed the FTC's final rulemaking process, leading to adjustments and refinements based on the input received. Overall, the FTC received overwhelming support for the proposed ban on noncompetes, with over 25,000 comments in favor of the initiative. Despite the overwhelming support for the final rule, it was not without opposition; the Commission approved the rule via a 3-2 vote.
The final rule will take effect 120 days after its publication in the Federal Register.
The FTC's final rule banning noncompete agreements marks a sea change in labor market dynamics, aiming to empower workers, stimulate innovation, and foster economic growth by eliminating barriers to job mobility and entrepreneurship nationwide, and it is critical for employers, workers, and employment law attorneys to understand how it impacts their work. You can learn more about state and federal employment law via MSBA's 2021 Employment Law Deskbook, available in both electronic and hardcopy versions, and MSBA’s Employment Law Institute, available on-demand.