On April 23, 2024, the Federal Trade Commission, or FTC, implemented a groundbreaking new ruling that sent ripples throughout the business world. This new rule bans almost all non-competes nationwide in an attempt to:
- Protect worker freedoms when seeking to change jobs
- Increase innovation across all areas of business
- Foster the formation and growth of new businesses
With this rule now in place, it is important for business owners to understand what it means for them and how it will impact contracts with employees – both currently and in the future.
Note: The rule will officially go into effect on September 4, 2024.
In this article, we will explain what this FTC Rule means, how the rule is beneficial, litigation against the rule, and what is next for employers moving forward. By the end, we hope that you have a thorough understanding of the new FTC ruling, what it entails, and what it seeks to improve over the next decade.
What Does the FTC Rule Mean?
Non-compete agreements have long been a standard feature of many employment contracts between employers and employees.
These clauses historically prevent employees from working for a competitor or starting a competing business for a certain period of time after leaving their current job. As it stands, nearly one in five Americans are subject to a non-compete agreement.
However, the FTC’s new rule effectively renders such agreements unenforceable in the vast majority of cases. Existing non-competes for senior executives can remain in effect, but employers are prohibited from entering into any new noncompetes, even if they involve senior executives.
The rule stipulates that non-compete agreements are deemed unfair methods of competition under Section 5 of the Federal Trade Commission Act. This means that any contract containing a non-compete clause will be considered a violation of federal law. The FTC’s jurisdiction extends to all industries, encompassing both low-wage and high-wage workers as stated previously.
Why is the New Rule Beneficial?
The FTC’s decision to ban non-compete agreements marks a significant victory for employees’ rights. These agreements have often been criticized for:
- Stifling worker mobility
- Limiting job opportunities
- Suppressing wages
By prohibiting their use, the FTC aims to promote competition, innovation, and economic growth.
Furthermore, the rule levels the playing field for workers, particularly low-wage employees who may be disproportionately affected by non-compete agreements. It empowers individuals to seek better employment opportunities without the fear of legal repercussions or being bound to their current employer indefinitely.
The FTC estimates that more than 8,500 new businesses could be created each year as a result of the new rule. Additionally, the new rule is expected to increase earnings for workers across the board as well as lower healthcare costs by up to $194 billion over the next ten years. 17,000 to 29,000 patents are also expected to be created yearly for the next decade.
More estimates can be found here.
Litigation Against the Final Rule
Unsurprisingly, the FTC’s final rule has sparked considerable debate and legal challenges. Some opponents argue that the FTC overstepped its authority by regulating non-compete agreements, which have traditionally been governed by state laws.
Others argue that the rule will disrupt business operations and hinder companies’ ability to protect their proprietary information and trade secrets.
Current litigation argues that the rule exceeds the FTC’s authority under the Non-Delegation Doctrine, the rule violates the Major Questions Doctrine, the rule exceeds the FTC’s authority under Sections 5 and 6(g) of the FTC Act, and the unconstitutionality of the FTC itself. More information on these points can be found here.
However, proponents of the rule argue that it is long overdue and necessary to fix the imbalance of power between employers and employees. They believe non-compete agreements have been misused to suppress wages, restrict job mobility, and inhibit competition, ultimately harming workers and the economy.
What’s Next for Employers?
For employers, navigating the implications of the FTC’s rule requires careful consideration and proactive measures. While non-compete agreements are no longer enforceable at the federal level, it is essential to review existing contracts and policies to ensure compliance with the new regulations. Employers should consult with experienced employment and antitrust counsel to discuss how they can handle existing non-compete agreements and related employment arrangements.
Employers should also explore alternative methods for protecting their proprietary information and trade secrets, such as:
- Confidentiality agreements
- Non-disclosure agreements
- Restrictive covenants
Additionally, fostering a culture of trust, transparency, and fair competition within the organization can help mitigate the need for restrictive employment practices.
Adapting to No Non-Competes
The FTC’s rule banning non-compete agreements represents a significant shift in employment law and signals a renewed focus on protecting workers’ rights. By eliminating barriers to job mobility and promoting competition, the rule aims to create a more equitable and dynamic labor market.
While the litigation surrounding the rule is likely to continue, employers must adapt to this new regulatory landscape and prioritize compliance to avoid potential legal liabilities.
Ultimately, fostering a fair and inclusive workplace environment benefits both employees and employers, driving innovation, productivity, and economic prosperity nationwide.