On April 23, the Federal Trade Commission issued a final rule to invalidate existing non-compete agreements and clauses in agreements. This decision, among other goals, intends to promote competition by banning non-competes nationwide.
The impact on workers and businesses
Non-compete clauses are widespread, imposing contractual conditions that prevent workers from taking a new job or starting a new business. An estimated one in five American workers—30 million people—are subject to a non-compete clause. The FTC’s final rule aims to protect workers’ fundamental freedom to change jobs, increase innovation, and foster new business formation.
The expected outcomes
The FTC anticipates that the recently implemented rule prohibiting non-compete agreements will have several positive outcomes. These include a projected annual growth of 2.7% in new business formation, resulting in over 8,500 additional businesses created annually. Additionally, workers should see higher earnings, with an estimated increase of $524 per year on average. The FTC also predicts the rule will reduce healthcare costs by up to $194 billion over the next decade. It also anticipates that it will spur innovation, leading to an estimated average of 17,000 to 29,000 more patents per year over the next ten years.
The exceptions
There are exceptions: existing non-competes for senior executives (representing less than 0.75% of workers) can remain in force. However, employers are prohibited from entering into new non-competes or enforcing them against workers other than senior executives. Employers must notify workers other than senior executives bound by an existing non-compete that they will not enforce any non-competes against them.
The road ahead
The FTC’s decision marks a significant shift in the employment landscape. While it has faced some setbacks: the Northern District of Texas issued its much-anticipated order preliminarily enjoining the effective date the rule will become effective 120 days after it’s published in the Federal Register. Still, that will only apply to parties listed in the lawsuit. Business owners, executives and others in business leadership must understand these changes and prepare for a future where non-compete agreements are no longer the norm. This decision promotes competition and fosters innovation and growth in the American economy. It also forces companies to rethink how they protect their intellectual property as well as hire and retain staff.