FTC: Employment Noncompete Agreements

On August 20, 2024, a district court issued an order stopping the FTC from enforcing the rule on September 4. The FTC is considering an appeal. The decision does not prevent the FTC from addressing noncompete agreements through case-by-case enforcement actions.

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The FTC has recently adopted the final Noncompete Rule (the Final Rule), a comprehensive ban on new noncompetes with all workers, including senior executives. The Final Rule provides that it is an unfair method of competition—and therefore a violation of Section 5—for employers to enter into noncompetes with workers. While there are possible challenges to the law, it's expected to become effective September 4, 2024. The Final  Rule is summarized below.

• For existing noncompetes, the Final Rule adopts a different approach for senior executives than for other workers. For senior executives, existing noncompetes can remain in force. Existing noncompetes with workers other than senior executives are not enforceable after the effective date.

  • Fewer than 1% of workers are estimated to be senior executives under the Final Rule.

  • Specifically, the Final Rule defines the term “senior executive” to refer to workers earning more than $151,164 who are in a “policy-making position.”

• The FTC estimates that banning noncompetes will result in:

  • Reduced health care costs: $74-194 billion in reduced spending on physician services over the next decade.

  • New business formation: 2.7% increase in the rate of new firm formation, resulting in an additional 8,500 new businesses created each year.

  • Rise in innovation: an average of 17,000-29,000 more patents each year.

    • This reflects an estimated increase of about 3,000 to 5,000 new patents in the first year noncompetes are banned, rising to about 30,000-53,000 in the tenth year.

    • This represents an estimated increase of 11-19% annually over ten years.

  • Higher worker earnings: $400-$488 billion in increased wages for workers over the next decade.

    • The average worker’s earnings will rise an estimated extra $524 per year.

• Next Steps

  • Once the rule is effective, market participants can report information on a suspected violation of the rule to the Bureau of Competition by emailing noncompete@ftc.gov

This information is posted for educational purposes only.

Source: FTC Website