American workers will soon no longer be bound by noncompete agreements following a new vote from the Federal Trade Commission.
The agreements legally bar workers from working for competitive businesses or starting their own competing businesses.
The FTC announced the new ban on April 23, predicting it will generate more than 8,500 new start-ups annually.
“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism,” said FTC Chair Lina M. Khan in a press release. “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 federal agency estimates that banning non-compete clauses for most employers in the country will increase earnings for the average worker by $524 per year and lower healthcare costs by up to $194 billion over the next ten years. The FTC also says the ban will encourage innovation and protect “the fundamental freedom of workers to change jobs.”
Approximately one in five workers – or 30 million Americans – are bound by a noncompete agreement.
“Noncompetes are a widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business,” states the FTC. “Noncompetes often force workers to either stay in a job they want to leave or bear other significant harms and costs, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave the workforce altogether, or being forced to defend against expensive litigation.”
The ban was first proposed in January of 2023 and formally adopted following a 3-2 vote from the five-member governing body. The policy will go into effect in August, 120 days after it is published in the Federal Register.
Employers can still require employees to sign nondisclosure agreements and the FTC’s ban does not alter trade secret laws. The agency reports that 95% of workers with non-compete clauses are also subject to an NDA. The ban also does not cover prohibitions on competing during an individual's employment.
Additionally, companies can still enforce existing noncompete agreements for senior executives – which is defined as a worker in policy-making positions who earns more than $151,164. No new noncompete agreements can be issued after the ban takes effect.
“The Commission has eliminated a provision in the proposed rule that would have required employers to legally modify existing noncompetes by formally rescinding them. That change will help to streamline compliance,” said the FTC. “Instead, under the final rule, employers will simply have to provide notice to workers bound to an existing noncompete that the noncompete agreement will not be enforced against them in the future.”
