FTC Institutes Rule Banning Noncompetes

The Federal Trade Commission (FTC) has announced a final rule banning noncompete clauses nationwide, aiming to promote competition, protect workers’ freedom, and foster innovation. This decision is expected to generate more than 8,500 new businesses each year, raise worker wages, lower healthcare costs, and drive innovation.

Noncompete clauses, which affect nearly one in five Americans, have been criticized for suppressing wages, stifling innovation, and limiting job mobility. The FTC’s rule will ban noncompetes for the vast majority of workers, with existing noncompetes for senior executives remaining in force, but with strict limitations.

The FTC estimates that the final rule will lead to a 2.7% annual increase in new business formation, resulting in over 8,500 additional startups each year. Workers can expect higher earnings, with an estimated increase of 524 per year, and healthcare costs are expected to decrease by up to 194 billion over the next decade. The rule is also expected to drive innovation, leading to an estimated 17,000 to 29,000 more patents each year for the next 10 years.

The FTC’s decision comes after a 90-day public comment period, during which the agency received over 26,000 comments, with over 25,000 in support of the proposed ban on noncompetes. The final rule takes into account the public’s feedback, making changes to the proposed rule to ensure a more effective and fair implementation.

Employers will be required to provide notice to workers bound by an existing noncompete that they will not be enforcing the agreement. The FTC has included model language in the final rule to aid employers in complying with this requirement.

The Commission found that noncompetes negatively affect competitive conditions in labor markets, inhibiting efficient matching between workers and employers. Noncompetes also tend to negatively affect competitive conditions in product and service markets, inhibiting new business formation and innovation.

Alternatives to Noncompetes

The FTC has identified alternatives to noncompetes, such as trade secret laws and non-disclosure agreements (NDAs), which can protect employers’ investments without restricting workers’ freedom. Employers can also compete for workers’ labor services by improving wages and working conditions.

The final rule will become effective 120 days after publication in the Federal Register. Market participants can report suspected violations of the rule to the Bureau of Competition.

This landmark decision marks a significant shift in the way employers approach worker contracts, prioritizing fairness, innovation, and competition.

Image: Depositphotos/ftc.gov

This article, "FTC Institutes Rule Banning Noncompetes" was first published on Small Business Trends