The U.S. Federal Trade Commission (FTC) today approved a proposed final rule banning most new noncompete clauses in employment contracts—a sweeping rule affecting millions of workers.
The rule also makes all existing noncompete agreements except for those covering senior executives unenforceable and requires employers provide notice to current and former workers that their noncompete clauses are no longer in effect. The FTC defines the term “senior executive” to refer to workers earning more than $151,164 annually who are in a “policy-making position.”
The rule goes into effect 120 days following its publication in the Federal Register. Enforcement could be further delayed by likely legal challenges.
The rule defines “noncompete clause” to mean a contractual term that blocks a worker from working for a competing employer, or starting a competing business, within a certain geographic area and period of time after the worker’s employment ends.
The rule also applies in some cases to agreements that require employees to pay back the employer for training costs if the worker’s employment terminates within a specified time period.
All current state laws limiting noncompetes would be preempted unless they provide greater worker protection than the FTC rule.
The FTC said noncompete clauses constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act. The agency estimated that about 20 percent of U.S. workers are bound by a noncompete agreement. The figure is higher in some industries, such as technology and health care.
Employers that use the policies typically cite the need to protect trade secrets and other sensitive information from rival firms looking to poach talent.
The FTC concluded that noncompete agreements suppress wages and harm competition by blocking workers from pursuing better opportunities and by preventing employers from hiring the best available talent.
“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC Chair Lina M. Khan. “Non-competes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation and healthy competition.”