FTC issues final rule banning noncompete clauses

The Federal Trade Commission (FTC) voted to issue a final rule on April 23 banning employers from using noncompete clauses in employment contracts.

Such agreements are commonly found in industries ranging from warehousing to medicine, according to the FTC. They’re intended to prevent employees from engaging in conduct that could increase competition for another party; as such, noncompetes may keep workers from joining another firm, for example, or bringing their current clients to a new firm, per Cornell Law School.

The FTC has argued noncompetes “[suppress] wages, [hamper] innovation, and [block] entrepreneurs from starting new businesses.” The agency estimates this rule could open up career pathways for some 30 million US workers, and result in increased earnings of $400 billion to $488 billion over a decade, or about $524 per worker on average annually.

What the rule says. The final rule will ban employers from entering into noncompetes with any workers from the date when it takes effect, 120 days from its publication in the federal register. The agency argues noncompetes are “an unfair method of competition,” in violation of Section 5 of the FTC Act.

Noncompetes that have already been signed will be unenforceable for most workers after the rule takes effect, though the agency did include an exception for senior executives. Existing noncompetes for senior executives can remain in effect, though employers will be banned from entering into new noncompete agreements with these workers.

These clauses “are far more likely to be negotiated and compensated” in the case of senior executives, “and thus senior executives are less likely to be experiencing acute ongoing harm from noncompetes,” Ben Cady, an attorney with the FTC, said on a webcast of the April 23 vote.

The FTC voted 3–2 to issue the final rule. The two Republican commissioners who dissented questioned the agency’s authority to issue it. “I’m particularly disappointed that the Commission dedicated the Commission’s limited resources to a broad rulemaking that exceeds congressional authorization and will likely not survive legal challenge,” Melissa Holyoak, one of the dissenting commissioners, said.

FTC Chair Lina Khan responded to concerns about the agency’s rulemaking authority, saying “the plain text of the FTC Act clearly gives the agency the authority to promulgate rules addressing unfair methods of competition…and when read alongside other provisions of the FTC Act, this authority becomes even clearer.”

How HR can prepare. Business groups including the US Chamber of Commerce have already sued the FTC to block the noncompete ban, so it’s not yet clear how soon employers may need to comply with the rule. Five states currently ban noncompete agreements, and New York legislators are expected to take up a ban this year after previous legislation was vetoed by Gov. Kathy Hochul in late December.

Given the heightened scrutiny around noncompetes, employers may more carefully consider why they’re asking workers to agree to these clauses, and whether there are other provisions they may consider in lieu of a noncompete, experts told HR Brew in February. Non-solicitation provisions or nondisclosure agreements, for example, can help protect organizations from competition as well as the sharing of confidential information without requiring workers to enter into noncompetes.