FTC announces rule banning noncompete agreements
The Federal Trade Commission (FTC) has introduced a new rule that bans the use of noncompetes with most workers in an effort to promote fair competition and innovation. Noncompetes are agreements that prevent workers from joining competing businesses or starting their own similar businesses for a certain period of time after leaving their job. The new rule seeks to make the job market more open and allow workers more freedom to choose their employment.
Under the new rule, it will be illegal for employers to enter into new noncompetes with most workers after the effective date. This includes employees at all levels of the company, with the exception of senior executives. Senior executives are defined as workers who earn more than $151,164 annually and hold positions that involve significant policy-making decisions. Noncompetes for these senior executives can remain in effect, while those for other workers are no longer enforceable.
Note: The regulation's effective date is 120 days AFTER publication in the Federal Register, not after the FTC's public announcement. The rule has not yet been published in the Federal Register as of April 29, 2024 but its publication is presumed to be imminent.
The FTC expects that banning noncompetes for most workers will lead to several positive changes in the economy. For instance, healthcare costs could decrease by up to $194 billion over the next decade due to lower spending on physician services. Additionally, the rate of new business formation is projected to rise by 2.7%, resulting in over 8,500 additional new businesses each year. This increase in entrepreneurship can lead to a rise in innovation, with an estimated 17,000-29,000 more patents being filed each year for the next decade.
Moreover, the rule could lead to higher wages for workers, with an estimated $400-$488 billion in increased earnings over the next decade. This translates to an average of an extra $524 per year for each worker. By allowing workers more freedom to change jobs and seek better opportunities, the rule aims to enhance competition and create a more dynamic economy.
3 Steps to Complying with the Noncompete Clause Rule
(taken from the FTC Business and Small Entity Compliance Guide)
1. Don’t include noncompetes in future employment contracts, paperwork, or websites
This applies to all workers, including senior executives. “Paperwork” includes employee handbooks and workplace policies.
2. If you have active noncompetes, give notice to those current and former workers who are not senior executives that their noncompetes are unenforceable
Model language for the notice can be found on the Noncompete Clause Rule page. If you prefer, you can write your own notice. You can deliver notice by e-mail or text message, or deliver a paper notice by hand or mail. If you don't have any contact information for a former worker, you don't have to send the notice. *Notice is not required for senior executives because their existing noncompetes are not affected by the Rule. As part of this step, consider whether any of your workers with active noncompetes are senior executives.
3. Don’t enforce existing noncompetes going forward for workers other than senior executives
For workers other than senior executives, don’t enforce a noncompete in court or threaten workers or former workers with enforcement. You can still enforce an existing noncompete with a senior executive. You can also still enforce a claim that a noncompete was breached before the Rule’s effective date.