On April 23, the Federal Trade Commission (FTC) in the U.S. issued a new rule after voting to ban for-profit US employers from using noncompete clauses in employment agreements.
The FTC estimates that 18% of U.S. workers, or nearly 30 million people, are bound by noncompete clauses. Noncompetes are a widespread practice and the FTC is arguing they are exploitative and stunting the American workforce. Typically, a noncompete clause lays out geographic or time restraints on an employee’s potential future role. The FTC says noncompete clauses stop workers from being able to take new jobs that pay more or start a new business. While noncompetes used to be reserved only for senior executives and powerful decision-making positions, they are now used as standard practice for roles ranging from doctors to baristas. The FTC believes this ban will lead to exponential new business formations, patent filings, and earnings increases. Their goal is to enable more mobility for workers within their field without bearing the financial cost of changing career fields or physically moving locations to avoid violating a noncompete. Proponents of this decision point to several states that have already banned noncompete clauses, most notably California which currently ranks as the world’s fifth-largest economy.
In January 2023, the FTC published a proposed rule that included 90 days to receive public commentary before voting on the rule. They received over 26,000 comments and made changes to the rule in response to the public’s feedback. The FTC reported that over 90% of the comments were in favor of the proposed ban.
Under this rule, existing noncompetes for senior executives will remain unaffected, but no new noncompetes may be entered into. Existing noncompetes for the majority of workers will become unenforceable after the rule goes into effect. However, legal challenges to this new rule will likely delay the effects of this decision. The day after this rule was announced, April 24, the U.S. Chamber of Commerce and other business lobbyist groups filed a complaint in federal court challenging the FTC’s right to issue this rule. They believe the FTC is overstepping its authority to make this determination without a legislative mandate from Congress. They have accused the FTC of undermining American businesses’ ability to protect their intellectual property and investments in training employees. The issue will likely remain unsettled for a while as legal action will take several months and the upcoming election could alter the direction of the FTC.
Kathleen Turpin, Law Clerk, BridgehouseLaw LLP Charlotte, NC
