Say Goodbye to Noncompete Agreements: FTC Votes to Ban Most Restrictions
In a landmark decision, the Federal Trade Commission (FTC) has taken a significant step toward reshaping the landscape of employment contracts by voting to ban nearly all noncompete agreements. These agreements, which typically prevent workers from joining competing businesses or launching their own ventures, have long been a contentious issue in the labor market.
The decision comes after the FTC received an overwhelming response from the public, with more than 26,000 comments submitted in the months leading up to the vote. Chair Lina Khan highlighted some of the stories shared by workers, illustrating the detrimental impact of noncompete agreements on individual liberties and economic freedom.
"We heard from employees who, because of noncompetes, were stuck in abusive workplaces," Khan stated in a story on NPR. "These accounts pointed to the basic reality of how robbing people of their economic liberty also robs them of all sorts of other freedoms."
The scope of noncompete agreements is vast, with an estimated 30 million people—equivalent to one in five American workers—being bound by these contracts. The FTC believes that eliminating these restrictions could lead to a significant boost in wages, totaling nearly $300 billion per year, by encouraging greater job mobility.
"By banning most noncompete agreements, the FTC has taken a crucial step towards empowering workers and fostering a more equitable employment landscape. This decision not only protects individual liberties but also opens doors to greater opportunities and fairer compensation for employees across industries." - Omar A. Lopez, ESQ, New Jersey Employment Attorney and owner of The Lopez Firm.
For many workers, the existence of noncompete agreements only becomes apparent when they attempt to change jobs. The ban, which will take effect later this year, aims to address this issue by prohibiting most noncompete agreements, except those negotiated by senior executives.
However, the decision was not unanimous. The vote, split 3 to 2 along party lines, drew criticism from dissenting commissioners Melissa Holyoke and Andrew Ferguson, who argued that the FTC was exceeding its authority. Holyoke expressed skepticism about the ban's legal standing and predicted it would face challenges in court.
Shortly after the vote, the U.S. Chamber of Commerce announced its intention to sue the FTC in an effort to block the rule. The Chamber has long opposed the ban, asserting that noncompete agreements are essential for protecting trade secrets and fostering employer investment in workforce training.
According to a breakdown of the rule by employment lawyer, Eric Myers of Pierson Ferdinand LLP:
The rule prohibits employers from entering into new noncompetes with all workers as of the effective date. The term “worker” includes employees and individuals classified as independent contractors and other kinds of workers. However, franchisor/franchisee non-competes are exempted. The final rule also includes an exception that allows noncompetes between the seller and buyer of a business.
In another departure from the proposed rule, the FTC's final rule allows existing noncompetes for senior executives to remain in force. The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions. Employers, however, cannot enter into or enforce new noncompetes with senior executives.
If employers have existing noncompetes in place when the final rule takes effect 120 days after publication in the Federal Register, they do not need to modify them by formally rescinding them. However, under the final rule, employers must notify those workers that the company will not enforce the noncompete in the future. The Commission has included model language in the final rule that employers can use to communicate to workers on paper, by mail, by email, or by text, stating that the employer will not enforce any non-compete clause against the worker.
The new rule does not generally impact NDAs or non-solicitation agreements unless they prohibit a worker from, penalize a worker for, or function to prevent a worker from seeking or accepting work or operating a business.
If states have more restrictive rules governing noncompetes, they will continue to apply.
As the debate over the ban continues, its implications for both employers and workers remain uncertain. While proponents argue that it will promote economic mobility and increase wages, opponents warn of potential legal challenges and adverse effects on business operations. Ultimately, the fate of noncompete agreements in the American labor market will be shaped by ongoing legal battles and broader policy discussions.
A link to the new rule can be found here: https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf?utm_content=bufferbc329&utm_medium=social&utm_source=linkedin.com&utm_campaign=buffer
