Key Takeaways
- Prohibition of new post-employment non-compete agreements between employers and employees, irrespective of industry or job level, effective from the specified date.
- Permitted continuation of existing post-employment non-compete agreements exclusively for senior executives, defined as individuals earning above $151,164 annually and holding policymaking roles.
- No mandatory rescission of existing non-compete agreements; however, employers must formally notify employees of their unenforceability.
- Exception granted for business sale scenarios, regardless of ownership stake.
- Exemption extended to franchisee/franchisor contracts, though employees under such agreements remain subject to the rule.
- Effective implementation slated for 120 days post-publication in the Federal Register.
Last week marked a pivotal moment as the Federal Trade Commission (FTC) takes a stand to promote competition and protect worker rights by issuing a final rule to ban noncompete agreements nationwide. This decisive action aims to safeguard the fundamental freedom of workers to change jobs, stimulate innovation, and encourage new business formation.
By banning non-competes, the FTC aims to unlock opportunities for American workers to pursue new job opportunities, launch innovative ventures, and bring fresh ideas to market.
The FTC estimates that the final rule will have far-reaching benefits, including:
- Increased Business Formation: The ban on non-competes is expected to spur new business formation by 2.7% annually, resulting in over 8,500 additional businesses created each year.
- Higher Earnings: Workers stand to gain with estimated earnings increasing by an additional $524 per year on average.
- Enhanced Innovation: The final rule is projected to drive innovation, potentially yielding an average increase of 17,000 to 29,000 more patents annually over the next decade.
Noncompete agreements, a widespread and often exploitative practice, impose restrictive conditions that hinder workers from pursuing new opportunities or starting their own businesses. An estimated 30 million workers, nearly one in five Americans, are subject to these agreements, which can result in significant harms such as lower wages, restricted career mobility, or even litigation.
Under the FTC's final rule, existing non-competes for most workers will no longer be enforceable except for senior executives. While senior executives represent a small fraction of the workforce, employers are prohibited from entering into or enforcing new non-competes with them.
The FTC's decision is grounded in its determination that non-competes constitute an unfair method of competition, violating Section 5 of the FTC Act. Non-competes impede efficient labor market dynamics, inhibit new business formation, and stifle innovation, ultimately harming consumers and market competitiveness.
Employers have viable alternatives to non-competes, such as trade secret laws and non-disclosure agreements, which protect proprietary information without stifling employee mobility. Additionally, employers can compete for talent by improving wages and working conditions, fostering a more dynamic and equitable labor market.
While the final rule retains provisions for existing non-competes with senior executives, it eliminates the requirement for formal rescission and mandates employers to notify affected workers. This streamlined approach aims to facilitate compliance and alleviate administrative burdens.
The FTC's decision to issue the final rule received a 3-2 vote. The rule will come into effect 120 days after publication in the Federal Register, signaling a new era of empowerment for American workers. We'll keep a close eye on updates regarding the final rule and ensure our blog stays current.
For personalized assistance navigating the evolving landscape of employment regulations and policies, contact Katie Hall, PHR Director of R+R Human Resources consulting services. She's here to help you understand your rights and obligations under the new non-compete regulations and ensure compliance with the law.
Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve. Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.
