The U.S. Federal Trade Commission (FTC) enacted a final rule banning most new noncompete clauses in employment contracts. This rule has the potential to impact millions of American workers as existing noncompete agreements will be unenforceable, except those involving senior executives earning over $151,164 annually who hold decision making positions.
According to the FTC, noncompete clauses constitute an unfair competitive practice in violation of Section 5 of the Federal Trade Commission Act. About 20% of U.S. workers are currently subject to these agreements, especially in fields like technology and healthcare. The FTC says noncompetes suppress wages, limit competition, and hinder workers from seeking better opportunities while restricting businesses' hiring options. Their intention for the rule is to encourage job mobility and wage competition by removing barriers that prevent employees from joining rival firms or launching similar businesses after leaving their current roles.
A noncompete clause is defined as any contract term preventing an employee from working with a competing employer or starting a similar business within a particular geographic area or timeframe post-employment. This new rule also covers certain training repayment agreements that financially penalize employees if they resign within a specified period.
The FTC’s ruling will override existing state laws on noncompetes unless those laws provide greater protections for workers. However, other types of employment covenants like nonsolicitation, nonrecruitment, nonservicing, or nondisclosure agreements remain permissible for safeguarding trade secrets and sensitive business information.
The proposed rule was initially introduced in January 2023 and received over 26,000 public comments, revealing strong public interest in the topic. The rule is scheduled to take effect 120 days after publication in the Federal Register, but it is expected that enforcement will face delays due to legal challenges.
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