Washington, D.C. – April 23, 2024
In a landmark decision, the Federal Trade Commission (FTC) today unveiled a final rule prohibiting the use of noncompete clauses in employment relationships nationwide. Currently, an estimated 30 million workers, or nearly one in five Americans, are bound by noncompete agreements. According to the FTC, these clauses have restricted workers’ ability to pursue better opportunities, leading to lower wages and less innovation. Today’s decision is designed to significantly enhance worker mobility, spur the creation of new businesses, and stimulate economic growth.
Economic Boost
Research conducted by the FTC predicts that the elimination of noncompete agreements will lead to a 2.7% annual increase in new business formation, equating to over 8,500 additional startups each year. Workers are expected to see an average annual earnings boost of $524, with the new rule also projected to reduce healthcare costs by up to $194 billion over the next decade. An estimated 17,000 to 29,000 additional patents are expected to be filed annually over the next ten years following today’s rule.
The final rule’s approval was passed with a 3-2 vote by the Commission. This decision followed a 90-day public comment period that garnered over 26,000 responses, overwhelmingly in favor of banning noncompetes.
Existing Employment Relationships
The final rule will become effective 120 days after its publication in the Federal Register. Not only will the implementation of the rule render noncompete provisions unenforceable for the vast majority of workers, but it also will require employers to inform employees bound by existing noncompetes that these provisions will no longer be enforced, with certain exceptions for senior executives.
Employers are advised to employ alternative methods to protect their interests without use of noncompete agreements. These alternative methods can include trade secret restrictions and non-disclosure agreements. Details on compliance and enforcement, including how market participants can report suspected violations, have been outlined by the FTC.
For assistance navigating this seismic change to the existing legal landscape, contact one of the employment law attorneys at Mortenson Taggart Adams LLP.
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