In a landmark decision aimed at fostering competition and protecting workers’ rights, the Federal Trade Commission (FTC) has issued a final rule banning noncompete agreements nationwide. This ruling, announced today, is poised to unleash a wave of innovation, bolster job mobility, and promote the formation of new businesses across the United States.
FTC Chair Lina M. Khan emphasized the significance of the ruling, stating, “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.”
Under the new rule, noncompete clauses, which restrict employees from working for competitors or starting their own ventures after leaving a job, will no longer be enforceable for the vast majority of workers. This move is expected to have far-reaching effects, including a projected increase of 2.7% in new business formation annually, leading to the creation of over 8,500 additional businesses each year.
Moreover, the FTC estimates that workers stand to gain, with average earnings projected to increase by an additional $524 per year. Additionally, healthcare costs could decrease by up to $194 billion over the next decade, and innovation is expected to flourish, resulting in an estimated average increase of 17,000 to 29,000 more patents annually over the next 10 years.
Noncompete agreements, which have been criticized for their restrictive nature and detrimental impact on workers’ freedom and economic mobility, have been a common practice, affecting approximately 30 million workers in the United States.
However, the FTC’s final rule ushers in a new era, signaling the end of these practices for the vast majority of workers. Notably, existing noncompetes for senior executives, representing less than 0.75% of workers, will remain enforceable, though new agreements with senior executives are prohibited.
The FTC’s decision comes after a thorough review process, which included a 90-day public comment period during which over 26,000 comments were received, overwhelmingly in support of the ban on noncompetes.
Furthermore, the Commission determined that noncompetes constitute an unfair method of competition, violating Section 5 of the FTC Act, and hinder efficient labor market dynamics and innovation.
In response to concerns raised during the comment period, the final rule has been refined to streamline compliance. Employers will no longer be required to formally rescind existing noncompetes but must instead provide notice to affected workers that these agreements will not be enforced in the future.
The Commission vote to approve the final rule was 3-2, with Commissioners Melissa Holyoak and Andrew N. Ferguson casting dissenting votes. Detailed statements from these Commissioners will be released at a later date.
The final rule will take effect 120 days after publication in the Federal Register, marking a significant milestone in the effort to promote competition, protect workers’ rights, and drive economic growth and innovation in the United States.
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