The Federal Trade Commission (FTC) just announced new rules that ban noncompete clauses in employment contracts, which could significantly impact many industries.
A noncompete clause legally restricts employees from working for a competitor or starting a competing business for a specified period after leaving their current job.
This agreement aims to protect the employer's business interests by preventing employees from using confidential information or relationships gained during employment that may benefit a competitor.
1. Today @FTC issued a final rule banning noncompetes for workers across the country.
— Lina Khan (@linakhanFTC) April 23, 2024
The rule will ensure that Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.https://t.co/Ax9QQtHuvn
The new regulation issued Tuesday, approved by a 3-2 vote, will affect hiring practices, especially in industries where brands and agencies have used noncompete clauses to keep executives from moving to competitors.
The End of Non-Compete Clause
According to an X post by FTC Chair Lina Khan, the commission received more than 26,000 comments from citizens since the ban on noncompete agreements was proposed in January 2023.
Of all the comments received, about 96% or over 25,000 are against noncompetes.
“People shared how noncompetes had kept them stuck in abusive jobs, forced them to uproot their families, or blocked them from pursuing better opportunities,” Khan wrote.
“The final rule provides that it is an unfair method of competition — and therefore a violation of Section 5 — for employers to enter into noncompetes with workers,” the Noncompete Rule stated.
Section 5 of the FTC Act refers to the prohibition of “unfair or deceptive acts or practices in or affecting commerce.”
The new rule will affect nearly one in five Americans who are currently subjected to noncompetes, according to the FTC.
Existing noncompetes for employees will no longer be enforceable once the rule takes effect “120 days after publication in the Federal Register,” except for senior executives in a current noncompete agreement who make more than $151,164 annually and are in policy-making positions.
U.S. Chamber of Commerce to Sue the FTC
The new rule is expected to have a significant impact on many industries, especially in ones where noncompetes serve as a standard clause to foster healthy competition between businesses while protecting closely guarded trademarks and data.
The FTC is nonetheless optimistic about the long-term effects of the Noncompete Rule, citing a marked increase in new businesses and patents, as well as higher salaries for employees.
However, the U.S. Chamber of Commerce doesn’t agree with the FTC, with President and CEO Suzanne P. Clark calling the rule “unlawful” and “a blatant power grab that will undermine American businesses’ ability to remain competitive.”
In a statement published right after the final vote on the Noncompete Rule, Clark announced that “The Chamber will sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked.”
Clark explained that the FTC does not have “the constitutional and statutory authority to write its own competition rules,” citing that its new rule effectively encroaches on a company’s ability to make legitimate business decisions.
“The Federal Trade Commission’s decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive."
— U.S. Chamber (@USChamber) April 23, 2024
Read @SuzanneUSCC's statement on why we will sue the FTC… pic.twitter.com/IdGgWQnaQR
“This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy,” Clark added.
The Chamber’s lawsuit could potentially delay or preclude enforcement of the new rule, and businesses can only wait and see whether the Noncompete Rule will ever be implemented.
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