The Federal Trade Commission (FTC) issued a final rule that bans noncompete clauses (NCCs) nationwide. An NCC in an employment contract specifying that an employee must not enter into competition with an employer after the employment period is over and are used in many industries, including O&P. The final rule will become effective 120 days after publication in the Federal Register. Employers will be required to provide notice to workers other than senior executives who are bound by an existing NCC that the NCC will not be enforced.
“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 said that instead of using NCCs to lock in workers, employers wanting to retain employees can compete on the merits for the worker’s labor services by improving wages and working conditions.
The FTC estimated that the final rule will lead to new business formation growing by 2.7 percent per year and is expected to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, lower healthcare costs by up to $194 billion over the next decade, and help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next ten years.
“Noncompetes are a widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business. 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. An estimated 30 million workers—nearly one in five Americans—are subject to a noncompete,” the FTC said when announcing the final rule.
Under the new rule, existing NCCs for most workers will not be enforceable after the rule’s effective date. Existing NCCs for senior executives, who represent less than 0.75 percent of workers, can remain in force, but employers are banned from entering into or attempting to enforce any new NCCs, even if they involve senior executives. Senior executives are workers who earn more than $151,164 annually and are in policymaking positions.
In January, the proposed rule was announced and subject to a 90-day public comment period. It received more than 26,000 comments, with over 25,000 comments in support of the ban.
In its ruling, the FTC determined that NCCs are unfair method of competition, and therefore a violation of Section 5 of the FTC Act, negatively affect competitive conditions in labor markets by inhibiting efficient matching between workers and employers, and negatively affect competitive conditions in product and service markets, inhibiting new business formation and innovation. There is also evidence that NCCs lead to increased market concentration and higher prices for consumers.
Employers have several alternatives to NCCs to protect their proprietary and other sensitive information, such as trade secret laws and nondisclosure agreements (NDAs). Researchers estimated that over 95 percent of workers with NCCs already have an NDA. The FTC also found that instead of using NCCs to lock in workers, employers wanting to retain employees can compete on the merits for the worker’s labor services by improving wages and working conditions.
To aid employers’ compliance with this requirement, the FTC included model language in the final rule that employers can use to communicate to workers.
Once the rule is effective, market participants can report information about a suspected violation of the rule to the Bureau of Competition by emailing noncompete@ftc.gov.
To read the final rule, visit the FTC website.
