On Tuesday, the Federal Trade Commission (FTC) voted 3-2 to ban employer non-compete agreements — a contract that employers require some workers to sign stating they can not work for a competing business for a specified amount of time after their employment with the company has ended.
About one in five workers — or 30 million people — are currently under a noncompete, according to the agency.
“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 in a company 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.”
Related: FTC Proposes Banning Non-Compete Agreements
If you’re currently subject to a noncompete, it will no longer be enforceable for most U.S. workers starting on the rule’s effective date, which is 120 days after publication in the Federal Register.
The exception, however, is senior executives who are locked into existing noncompetes, though employers are not permitted to enforce or enter any senior executives into new non-compete agreements.
Senior executives are defined as “workers earning more than $151,164 annually and who are in policy-making positions,” per the FTC’s new ruling.
Employers will now also have to alert any existing employees with noncompetes who are not senior executives that they are no longer locked into their agreements.
The commission originally outlined a proposal to ban the contractual agreements in January 2023, defining noncompetes at the time as a contract that “has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.”
By banning noncompetes nationwide, the agency estimates that new business formation will increase by 2.7% annually, the average worker’s annual earnings will increase by $524, and healthcare costs will plummet by $194 billion in the next 10 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,” the FTC said in a statement. “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.”
Related: What to Know About These Tricky Employment Agreements
After the rule is effective, employees who believe they have been subject to a violation of the enforceable law can report their current or former employer by emailing noncompete@ftc.gov.
