FTC Votes to Ban Most Noncompete Agreements

In a significant move that could reshape the American workforce landscape, the Federal Trade Commission (FTC) voted 3-2 on Tuesday to prohibit most noncompete agreements, marking a pivotal moment that could dramatically alter career mobility and compensation across numerous sectors. This new rule is set to eliminate most existing noncompete clauses and prevent their future use, potentially affecting tens of millions of American workers.

Noncompete agreements, which restrict employees from joining competitors or starting similar businesses shortly after leaving a company, are said to be currently binding around 30 million people, or about 18 percent of the U.S. workforce. The FTC argues that eliminating these agreements will enhance job mobility, boost wages by an estimated $300 billion annually, and foster entrepreneurship, potentially leading to the creation of over 8,500 new businesses each year.

FTC Chair Lina Khan highlighted the broader economic benefits, stating, “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.”

The rule does provide a carveout, allowing noncompete agreements to remain for senior executives. Senior executives are defined as those who earn over $151,164 annually and hold a policy-making position.

The FTC’s decision has sparked considerable backlash from large business organizations. These groups argue that noncompete clauses are essential for protecting trade secrets and maintaining competitive advantages. They also contend that the FTC has exceeded its regulatory authority by implementing this ban.

While the rule is set to take effect 120 days after its publication in the Federal Register, this timeline may be extended by expected lawsuits. Legal experts, like Stefan Meisner of Crowell & Moring, suggest that companies should prepare for compliance while keeping an eye on the judicial response to the rule.

Amidst this regulatory change, Congress has seen bipartisan support for reforming noncompete agreements, with several bills like the Workforce Mobility Act and the Freedom to Compete Act introduced to limit their use. This legislative attention underscores a growing consensus on the need to balance business interests with workers’ rights to mobility and fair compensation.