Skip to main content

D.C. Deletes Non-Competes: FTC Issues Landmark Ruling

May 8, 2024

Many of us have been there.  We seek and land a great job, but there’s just one catch.  To lock up the position, we must first sign away our future right to seek employment in the same industry, up to a certain period of time (two years is standard), should we ultimately part ways with this new firm.  This has been seen by many as unfair to the individual worker, and yet it has been a widespread tactic utilized by many companies in many industries across the country.  But those days are coming to a close.

A New Era for Employees

On April 23, 2024, the Federal Trade Commission (FTC) published a final rule that effectively bans so-called noncompete agreements within the United States.  According to FTC Chair Lina M. Khan, “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 FTC estimates that the final rule banning noncompetes will lead to new business formation growing by 2.7 percent per year, resulting in more than 8,500 additional new businesses created each year.  The final rule is expected to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and it is expected to lower healthcare costs by up to $194 billion over the next decade.  In addition, the final rule is expected to help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years under the final rule.

The final rule will become effective 120 days after publication in the Federal Register.

Who’s Affected?

Currently, an estimated 18 percent of U.S. workers are covered by noncompete agreements, which translates to 30 million individuals. Under the FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date. 

Existing noncompetes for senior executives—who represent less than one percent of workers—can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives.  The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions.  Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompetes against them.

Alternatives to Noncompetes

The FTC found that employers have several alternatives to noncompete agreements that still enable firms to protect their investments without having to enforce such agreements.  Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information. Researchers estimate that over 95 percent of workers with a noncompete already have an NDA.

The Commission also found that, instead of using noncompete agreements to lock in valued workers, employers wishing to retain employees can always engage in the good old-fashioned labor market strategies used since time immemorial.  These would include improving wages and working conditions.

Notice Requirement

In addition to the primary provision of the final rule that bans most noncompete agreements, the rule also eliminated a provision in the proposed rule that would have required employers to legally modify existing noncompetes by formally rescinding them.  The final rule removes this potentially onerous requirement.  Instead, employers will simply have to provide notice to workers bound to an existing noncompete that the noncompete agreement will not be enforced against them in the future.

To aid employers’ compliance with this requirement, the Commission has included model language in the final rule that employers can use to communicate with workers.  For a fact sheet on the final rule, go to the following link:  Noncompete Rule | Federal Trade Commission (ftc.gov).  To view the complete text of the final rule, click on the following link:  Non-Compete Clause Final Rule (ftc.gov).

Get the Latest RCM News Delivered

Receive practical tips on medical billing and breaking news on RCM in your inbox.

Get in Touch