FTC Adopts Rule Banning Most Noncompete Agreements
The U.S. Federal Trade Commission (FTC) adopted a new Noncompete Rule that bans new noncompetes with all U.S. workers, including senior executives (defined by the FTC as individuals earning more than $151,164 who are in a “policy-making position”). The rule will also apply retroactively to non-executives after the final rule’s effective date—120 days after it is published in the Federal Register.
The commission estimates that some 30 million workers (about 20 percent of U.S. workers) are currently bound by noncompete agreements.
Noncompete agreements have long been used to block employees from taking jobs with rival companies or from competing with their employer directly or indirectly for a specific amount of time after their employment has ended, the Associated Press reported. Employers argue that these policies help protect trade secrets and other information from rival firms looking to poach talent or gain an advantage. The measures are commonly associated with high-level executives at technology and financial companies—especially those in Silicon Valley, WIRED noted—but in recent years their use has expanded, affecting security guards and restaurant workers. In 2021, the Federal Reserve Bank of Minneapolis found that more than one in 10 workers who make $20 or less an hour are covered by noncompete agreements, restricting their access to different job opportunities.
In the past, the FTC has taken aim at overly restrictive noncompete agreements, including within security companies, according to the Center for Economic and Policy Research.
In 2023, the commission took legal action against Prudential Security, Inc., and Prudential Command, Inc., for requiring security guards to sign contracts containing restrictions that prohibited them from working at a competing business within 100 miles of their job site for two years after leaving the company. Violations of the clause could cost former employees a $100,000 penalty. Even after Prudential sold off the bulk of its business to another security company, its former guards remained restricted by the noncompetes.
In its new rule, the FTC argued that noncompete agreements represent an unfair method of competition, violating Section 5 of the FTC Act of 1914.
The FTC estimates that banning noncompetes will result in reduced healthcare costs, a 2.7 percent increase in new business formation, a rise in innovation and new patents, and higher worker earnings—with the average worker’s earnings rising an estimated extra $524 per person per year.
The FTC voted 23 April in a 3-2 decision to ban noncompete agreements, but the rule is sure to be challenged in court. The U.S. Chamber of Commerce and other business groups have already sued the FTC about the new rule, The Washington Post reported. The chamber argues in its suit that the FTC lacks the authority to issue such a sweeping and consequential rule.
Enforcement of the FTC rule is likely to be delayed as a result of the legal battles to come.
