The Federal Trade Commission issued a final rule that will effectively ban all noncompete agreements nationwide. In a statement, the agency said it was “protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.”
“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. “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 growth of 2.7 percent per year, resulting in more than 8,500 additional new businesses created each year. It also said 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 – who represent less than 0.75 percent of workers – 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.
Many Business Groups Oppose the Rule
Shortly after the final rule was passed, the Business Roundtable, a pro-business advocacy organization issued a statement opposing the ban. “Business Roundtable strongly opposes the FTC’s final rule banning virtually all noncompete agreements. The FTC’s categorical prohibition on noncompete agreements is misguided and far beyond the agency’s statutory authority,” said Business Roundtable CEO Joshua Bolten. “When appropriately used, reasonable noncompete agreements protect essential investments in employees, R&D and innovation. By banning most noncompete agreements, the FTC’s rule will disincentivize investments in workers and make it harder for companies to compete globally.”
Legal challenges have already been filed against the new rule. Business groups led by the U.S. Chamber of Commerce, tax services firm Ryan LLC, and a Pennsylvania tree trimming company have already filed three lawsuits claiming that the FTC, which enforces antitrust laws, lacks the power to determine which business practices amount to unfair competition and should be banned. It remains to be seen if those legal challenges will be successful in overturning or halting the enforcement of the new rule. 
Joseph McCafferty is editor & publisher or Internal Audit 360°.