Earlier this week on April 23 the Federal Trade Commission issued a final rule to promote competition by banning noncompetes nationwide.
“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,” said FTC Chair Lina M. Khan in a press release. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business or bring a new idea to market.”
The FTC estimates that the final rule banning noncompetes will lead to new business formation growing by 2.7 percent per year, resulting in more than 8,500 additional new businesses created each year. The final rule is expected to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and it is expected to lower health care costs by up to $194 billion over the next decade. In addition, the final rule is expected to help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years under the final rule.
Under the FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date. Existing noncompetes for senior executives can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompetes against them.
The Commission found that employers have several alternatives to noncompetes that still enable firms to protect their investments without having to enforce a noncompete. Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information. Researchers estimate that over 95 percent of workers with a noncompete already have an NDA.
The Commission also finds that instead of using noncompetes to lock in workers, employers that wish to retain employees can compete on the merits for the worker’s labor services by improving wages and working conditions.
To read the complete document outlining the details of this new rule click here.
The final rule will become effective 120 days after publication in the Federal Register.
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