FTC Banned Noncompete Clauses
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Noncompete Clauses Banned for Good

Yesterday, 23rd April 2024, the Federal Trade Commission announced a final rule banning Noncompetes, effective 120 days after publication in the Federal Register.

This rule comes into play over a year after the FTC first issued a proposed rule in January 2023, which received more than 26,000 comments from the public and 25,000 comments in support for the FTC’s proposed ban on noncompetes. It was these comments, the public’s feedback, which ultimately informed the FTC’s final rule yesterday.

Benefits of Final Rule Banning Noncompetes

“This rule will generate over 8,500 of new business each year, raise worker wages, lower health care costs and boost innovation” stated the FTC press release.

Why can the FTC claim more new business, higher worker wages, lower health care costs and a boost in innovation?

They say that 18% of US workers are currently covered by noncompetes, that’s 1 in 5 workers or 30 million people affected by the new noncompete rule.

Thus, they predict the below following the final rule banning noncompetes:

  • New business formation growing by 2.7% per year.
  • Earnings increase for the average worker by an additional $524 per year.
  • Lower healthcare costs by up to $194 billion over the next decade.
  • Increase of an average of 17,000-29,000 more patents each year for the next 10 years under the final rule.

The FTC describe noncompetes as an “often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business.”

This is great news for any workers joining the workforce from today.

What if you are already employed under a noncompete?

Existing noncompetes for Senior Executives (who represent only 0.75% of US workers) can unfortunately remain in force under the final FTC rule. Senior Executives are defined in the final rule as workers earning more than $151,164 annually and who are in policy-making positions.

However, for the vast majority of workers the existing noncompetes will no longer be enforceable and employers do not have to legally modify existing noncompetes by formally rescinding them for the new rule to be in-effect; a decision by the FTC that will massively reduce work on behalf of businesses to be compliant.

There is also evidence that noncompetes lead to increased market concentration and higher prices for consumers. But what about the effect on existing businesses?

“The commission found that employers have several alternatives to noncompetes that still enable firms to protect their investments without having to enforce a noncompete.”

Alternative to Noncompetes for Businesses

  • 95% of workers with a noncompete already have a non-disclosure agreement (NDA) which provide employers with well-established means to protect proprietary and other sensitive information.
  • Trade Secret Laws also give employers the means to protect sensitive information.
  • The commissions suggests employers wishing to retain employees can compete on the merits of the workers labor services by improving wages and working conditions.

The FTC advise that once the rule is effective, market participants can report information about a suspected violation of the rule to the Bureau of Competition by emailing [email protected].

If you have any concerns over how this new rule effects you or your business then Adapt is always happy to help and advise, no strings attached, contact us.