Federal Trade Commission Finalizes Rule to Ban Noncompetes Nationwide

The Federal Trade Commission (FTC) has finalized a rule that bans noncompete clauses across the United States, marking a significant move to bolster competition and support worker mobility. This nationwide prohibition aims to enhance job flexibility, spur innovation, and encourage the establishment of new businesses.

According to the FTC, the elimination of noncompete agreements is projected to increase the formation of new businesses by 2.7% annually. This could result in an addition of approximately 8,500 new businesses each year. The rule is also expected to boost workers' earnings, with average annual increases of about $524 per worker.

Furthermore, the FTC anticipates significant long-term economic benefits, including a potential reduction in healthcare costs by up to $194 billion over the next decade. The rule could also significantly boost innovation, potentially leading to an increase of 17,000 to 29,000 new patents annually for the next ten years.

The new rule stipulates that current noncompete agreements will no longer be enforceable for the vast majority of workers following its effective date. However, existing noncompetes for senior executives, who represent less than 0.75% of the workforce, will remain valid. Employers are prohibited from drafting or attempting to enforce new noncompetes, including those involving senior executives, and must notify workers, excluding senior executives, about the non-enforcement of existing noncompetes.

Alternatives to Noncompetes:

The FTC noted that employers could utilize alternative methods such as trade secret laws and non-disclosure agreements (NDAs) to protect sensitive information without restricting workers' employment opportunities. Over 95% of employees currently bound by noncompetes already have an NDA in place.

Additionally, the FTC encourages employers to retain talent by competing based on merit, such as through enhanced wages and improved working conditions, rather than relying on noncompetes.

This groundbreaking rule will take effect 120 days after its publication in the Federal Register, signaling a major shift in employment practices aimed at fostering a more dynamic and competitive labor market.