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On April 23, 2024, the FTC (Federal Trade Commission) announced a new rule banning non-compete agreements. If you signed a non-compete, read on to learn whether this new rule applies to you
How Did the FTC’s New Rule Change the Law of Non-Competes?
The Federal Trade Commission issued a final rule banning noncompetes nationwide with only a few exceptions. One exception applies to senior executives, explained below. This rule, the FTC reasoned, will promote competition and will protect the fundamental freedom of workers to change jobs, increase innovation, and foster new business formation.
The rule will become law 120 days after it is published in the Federal Register, which will probably happen in a few days. But legal challenges could delay or block the change. Already, Dallas-based global tax services and software provider Ryan has filed a lawsuit in federal court challenging the Federal Trade Commission’s new non-compete rule. The U.S. Chamber of Commerce says that it too will file suit to halt the new rule’s application.
Eventually after the litigation winds it way through the court system, experts predict that the rule will become the law of the land. President Biden celebrated the F.T.C.’s vote, stating, “Workers ought to have the right to choose who they want to work for,” This landmark ruling will greatly change the landscape of the American workplace for those who work under the chains of a noncompete agreement.
What Was the FTC’s Basis for Banning Non-Competes?
Since January 2023 when the FTC first proposed this rule, it has reviewed the entire record that it had compiled, which included empirical research on how non-competes affect competition and over 26,000 public comments. In one of the comments that were submitted to the FTC, a physician aptly described the negative constraints caused by non-competes:
[N]on-compete clauses have become ubiquitous in the healthcare industry. With hospital systems merging, providers with aggressive non compete clauses must abandon the community that they serve if they choose to leave their employer. . . Healthcare providers feel trapped in their current employment situation, leading to significant burnout that can shorten their career longevity. Many are forced to retire early or take a prolonged pause in their career when they have no other recourse to combat their employer.
Another physician explained that he had signed a non-compete many years ago, and his employer merged with and became a subsidiary of a large entity that he wants to leave. Now, he says, “I am bound to this organization under threat of legal coercion. . . . My only recourse to this coercion is to give up medical practice anywhere covered by my current medical license, which is injurious to the patients in my care, and to myself.”
In its fact sheet, the FTC presented other real-life scenarios showing detrimental effects of non-compete agreements. For example, a single father employed as a security guard was compelled to leave his overnight position, paying $11 per hour, due to a lack of nighttime childcare. Despite securing a similar daytime job offering $15 per hour, his former employer notified the new employer contesting his employment based on a non-compete clause, and the new employer terminated the man.
These examples underscore the unequal power dynamics that non-compete contracts allow employers to wield. Additionally, the FTC estimates that removing barriers to job mobility in the American workforce could result in potential annual gains of up to $296 billion.
In the final rule, the Commission deemed it unfair competition and a breach of Section 5 of the Federal Trade Commission Act for employers to engage in noncompete agreements with employees and to enforce specific noncompete clauses. The non-compete ban will profoundly transform the labor market moving forward.
Senior Executives Are Exempted from the FTC’s Ban on Non-Competes
The FTC’s new rule excludes senior executives from the rule’s prior application. The rule defines executives as employees “in policy-making positions” who make at least $151,164 annually. With respect to existing non-competes, i.e., non-competes entered into before the final rule’s effective date, those non-competes can remain in force; the final rule does not cover such existing agreements.
The new rule prohibits non-compete agreements with senior executives in the future, however. If you are negotiating for a new position and the employment agreement contains a non-compete, it will not apply. The non-compete portion of the contract will not be effective.
The final rule allows existing non-competes with senior executives to remain in force because this subset of workers is less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers subject to existing noncompetes and because commenters raised credible concerns about the practical impacts of extinguishing existing non-competes for senior executives.
What Does The Non-compete Ban Mean For Workers?
For workers that are not exempted, which is the majority of America’s workforce, employers must notify workers that any previous non-compete agreements are no longer effective and that no one can be required to sign a non-compete agreement in the future.
Non-compete agreements have long been a contentious issue, affecting individuals across various industries, from entry-level workers to high-ranking executives. As we have discussed in “A Non-Compete Restriction Must Be ‘Reasonable,” these agreements typically restrict employees from pursuing opportunities with competitors or starting their own ventures so long as the restrictions are reasonable.
The Biden administration and proponents of the ban argue that non-competes harm workers by pushing down wages and discouraging innovation, hampering growth in the economy. FTC Chair Lina M. Khan states that “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” and “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.”
Critics, on the other hand, argue that these agreements often stifle career growth and economic mobility. Businesses claim that non-compete agreements are essential for protecting proprietary information. They state that non-compete agreements in fact encourage, not limit, innovation while safeguarding trade secrets and that non-competes benefit employers and employees alike.
Under the FTC’s new rule, the vast majority of current non-compete agreements will become unenforceable. While current non-competes for senior executives, comprising less than 0.75% of the workforce, may remain valid, the final rule prohibits employers from initiating or enforcing new non-compete agreements, even for senior executives. Employers must notify workers, bound by existing noncompetes, that such agreements will not be enforced against them.
Contact Us.
Do you have questions or concerns about how the FTC’s new ban will affect you? At Gardner Employment Law, we stay up to date on the language and implications of news from the FTC. If you need clear guidance on your non-compete agreement in light of this major change in the law, do not hesitate to reach out to us.