HTLJ
The FTC proposed a rule that narrowly passed to ban most employers from using noncompete clauses in hiring.[1] While it does not go into effect immediately (in about 120 days), this approval will have massive implications on the job market, economy, and overall regulation practices moving forward.[2]
Noncompete clauses are a provision that prevents employees from accepting employment with a competitor or starting a competing business within certain timeframe and geographic limits. This can be incredibly burdensome to the working class who rely on their income to live more so than the upper class. If they leave their position, they face limitations about where they can work and how long they have to wait before starting a new role that would compete with their old one; this will no longer be the case. At the time of this administrative ruling, about 30 million workers are covered by a noncompete clause.[3] For these employees, most of their noncompete clauses will now become null and void.[4] New noncompete clauses will be banned for everyone, and existing noncompete clauses for lower-level employees will become unenforceable. However, executives will still be bound by their existing noncompete clauses.[5]
Noncompete agreements also keep wages low by reducing employees’ abilities to freely switch jobs for better working conditions.[6] Advocates for the ban expressed reports of instances where employees had to turn down higher offers or even move states for new work due to their being bound by a noncompete agreement with their employer. Legislators speculate that as a result of this ban, wages will rise. Research suggests that the average worker will make $529 more every year, with an impact of billions of dollars collectively, because workers will no longer be bound to their positions.[7] This is significant because employees will be free to move to higher and better paying positions and newer employees can fill those emptied roles, pushing job cycles forward. Further, employees who would like to part ways with their employers to start their own businesses within the same field, such as attorneys and bankers looking to create their own firms, are now able to do so, which can generate exponentially more available positions in the future.
This ban comes after years of historical legal disputes between technology companies and their employees where these corporate giants have brought legal action against employees for attempting to job hop to other competitors. This has gone as far back as the early 2000s, where Microsoft sued AI-pioneer Kai-Fu Lee after he left Microsoft for a new role at Google in 2005. Amazon has been notorious in this space, maintaining noncompete clauses for even their factory workers until 2015.[8] States, such as California and Washington, have stepped in to place limits on noncompete clauses by inhibiting time limits and baseline salary requirements, but this new Federal ban is the first to impose nationwide limits on how companies can impact their former employees’ abilities to find future work.[9] The FTC postulates that more than 8,500 new startups will be created now that noncompete agreements are banned, which can drive corporate diversification and promote job growth.[10]
Many employees are supportive of the ban and its implications, but as expected, some organizations are planning to fight the ruling. The Chamber of Commerce, in particular, is voicing doubts that the Federal Trade Commission is legally within their jurisdiction to ban noncompete agreements. The FTC Act passed by Congress provides the FTC with the authority to issue rules to carry out its obligations and also prohibits unfair methods of competition, which the FTC is stating they are enforcing with this new rule.[11] FTC Chair Lena Khan made a statement that FTC has determined that noncompete agreements are unfair methods of competition, and therefore, they have decided to issue a rule to outlaw them.[12]
For corporations, trade secrets will remain protected. This ban does not cover nondisclosure agreements or non-solicitation agreements, so they will likely remain enforceable as long as they are not functionally equivalent to the subtext of a non-compete clause.[13] There are also notable exceptions to the non-compete ban including non-compete agreements between businesses, franchisor-franchisee relationships, and nonprofit healthcare employees. Generally, the infrastructure regarding post-employment secrecy and disclosure protection shall remain intact, and moving forward, corporations will need to be mindful to not encroach on the rights of their employees to pursue work elsewhere and should look forward to the new churn of economic stimulation that this ruling will bring.
[1] Federal Trade Commission, FTC Announces Rule Banning Noncompetes (Apr. 23, 2024), https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes.
[2] Kate Gibson, FTC bans noncompete agreements, making it easier for workers to quit. Here’s what to know, CBS News, https://www.cbsnews.com/news/ftc-noncompete-agreement-ban/ (Apr. 24, 2024, 10:17 AM).
[3] Jeanne Sahadi, FTC votes to ban most employers from using noncompete clauses. But legal challenge is expected, CNN https://www.cnn.com/2024/04/23/success/ftc-bans-non-compete-clauses/index.html (Apr. 23, 2024, 5:06 PM).
[4] Gibson, supra note 2.
[5] Id.
[6] Christopher Rugaber, Associated Press, ‘Noncompete’ agreements would be barred for most employees under this new rule, PBS News Hour (Apr. 4, 2024, 5:31 PM), https://www.pbs.org/newshour/economy/noncompete-agreements-would-be-barred-for-most-employees-under-this-new-rule#:~:text=When%20it%20proposed%20the%20ban,with%20their%20biggest%20pay%20increases.
[7] Andrew Keshner, The FTC is banning noncompete agreements. Did your job search just get easier?, Morningstar (Apr. 24, 2024, 11:29 PM), https://www.morningstar.com/news/marketwatch/20240424364/the-ftc-is-banning-noncompete-agreements-did-your-job-search-just-get-easier.
[8] Todd Bishop, Good Riddance? Critics of non-competes say tech companies may ultimately benefit from FTC ban, Geekwire (Apr. 24, 2024, 10:46 AM), https://www.geekwire.com/2024/good-riddance-critics-of-non-competes-say-tech-companies-may-ultimately-benefit-from-ftc-ban/.
[9] Id.
[10] Id.
[11] More Perfect Union, The FTC Just Banned Non-Competes: Here’s What It Means For You, YouTube (Apr. 23, 2024), https://www.youtube.com/watch?v=QpEtYOlA7cQ.
[12] Id.
[13] Arends et al., FTC Votes to Issue Final Rule Banning Most Non-Compete Agreements Nationwide, Husch Blackwell (Apr. 24, 2024), https://www.huschblackwell.com/newsandinsights/ftc-votes-to-issue-final-rule-banning-most-non-compete-agreements-nationwide.
