The New Rule and Ban on Non-compete Agreement by FTC
Background
Non-compete agreements are contractual conditions that prevent workers from taking a new job or starting a new business1. They have been a widespread and often exploitative practice, imposing significant harms and costs on workers1. An estimated 30 million workers—nearly one in five Americans—were subject to a non-compete1.
The New Rule
On April 23, 2024, the FTC issued a final rule to promote competition by banning non-competes nationwide1. The rule protects the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.
The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market1. The FTC estimates that the final rule banning non-competes will lead to new business formation growing by 2.7% per year, resulting in more than 8,500 additional new businesses created each year1.
Implications
The final rule is expected to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year1. It is also expected to lower health care costs by up to $194 billion over the next decade1.
In addition, the final rule is expected to help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years under the final rule1.
Exceptions
Existing non-competes for senior executives – who represent less than 0.75% of workers – can remain in force under the FTC’s final rule1. However, employers are banned from entering into or attempting to enforce any new non-competes, even if they involve senior executives.
Employers will be required to provide notice to workers other than senior executives who are bound by an existing non-compete that they will not be enforcing any non-competes against them1.
What are the arguments for non-compete agrement?
Non-compete agreements, while controversial, do have certain arguments in their favor. Here are some of the key points:
- Prevents Former Contractors from Competing: Non-compete agreements can prevent former contractors such as employees, partners, associates, service providers, suppliers, or vendors from pursuing a profession or trade that could potentially harm the interest of the former contractee1.
- Retains Agreement and Business Continuation: In an employment contract, a non-compete agreement prevents valuable employees from leaving the organization to work with a competitor. When used in service contracts and vendor agreements, it compels contractors to act in good faith and remain true to the terms and conditions of their contracts1.
- Protects Trade Secrets and Other Information: Non-compete agreements function as a specific measure in data and information security, especially in protecting trade secrets and proprietary information. They complement non-disclosure agreements by providing an additional layer of protection1.
- Establishes Expectations and Ground Rules: Non-compete agreements can be a good way to establish expectations and ground rules for employees at the outset of their employment2.
- Protects Sensitive Business Information: Non-compete agreements can help protect sensitive business information and intellectual property, and keep former employees from creating close competition for your business3.
While these are some of the arguments in favor of non-compete agreements, it’s important to note that they are not without controversy. Critics argue that they can limit workers’ freedom to explore professional opportunities and can create a negative impression among contractees1. Therefore, the use of non-compete agreements should be carefully considered and balanced against potential drawbacks.
What are the arguments against non-compete agreements?
Non-compete agreements, while they have their proponents, also have a number of detractors. Here are some of the key arguments against non-compete agreements:
- Limits Freedom to Explore Opportunities: Non-compete agreements can limit contractors’ freedom to explore professional or trade opportunities outside the purview of their contractors1. This can be particularly disadvantageous for partners and associates, service providers, suppliers, or vendors1.
- Creates Negative Impression: Non-compete agreements can create a negative impression among contractees1. They can be seen as overly restrictive and may deter potential employees or contractors1.
- Places Contractors at Risk: Non-compete agreements can put contractors at considerable risk1. For example, if a contractor is fired or loses their job, a non-compete agreement could prevent them from working in their industry2.
- Restricts Job Mobility: Non-compete clauses often force workers to either stay in a job they want to leave or bear other significant harms and costs, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave the workforce altogether, or being forced to defend against expensive litigation.
- Undue Hardship on the Employee: Non-compete agreements can place an undue hardship on the employee4. This can be particularly true for lower-wage workers who may have fewer job opportunities available to them5.
- Against the Interests of the Public: In some cases, non-compete agreements can be seen as against the interests of the public4. For example, they can stifle competition and innovation, which can have broader societal impacts1.
While these are some of the arguments against non-compete agreements, it’s important to note that the use of such agreements can vary widely depending on the specific circumstances, including the industry, the nature of the work, and the level of the employee or contractor. Therefore, the impact and appropriateness of non-compete agreements can be quite context-dependent.
Is the ban enforced in every state?
Yes, the Federal Trade Commission’s (FTC) ban on non-compete agreements is enforced nationwide in the United States1. This means it applies in every state. The rule was issued to promote competition by banning non-competes, protecting the fundamental freedom of workers to change jobs, increase innovation, and foster new business formation1. However, it’s important to note that the rule already faces legal challenges that could impact or delay its implementation or result in its invalidation2. Therefore, the enforcement of the ban may vary depending on the outcome of these legal challenges2.
What are the potential consequences for employers who violate the ban?
Employers who violate the Federal Trade Commission’s (FTC) ban on non-compete agreements could face significant consequences1. Here are some potential repercussions:
- Adverse FTC Enforcement Action: The FTC may take enforcement action against employers who fail to comply with the new rule1.
- Prohibitive Injunctions: Courts may issue prohibitive injunctions, which are orders that restrain or command certain actions. This could prevent employers from continuing to enforce non-compete agreements1.
- Civil Penalties: Employers could be subject to civil penalties. For each individual offense, the penalty could be up to $10,0001.
- Reputational Damage: Employers who violate the ban could also suffer reputational damage, which could impact their relationships with employees, customers, and the public2.
It’s important to note that the new rule is slated to take effect 120 days after its publication in the Federal Register3. However, the rule already faces legal challenges that could impact or delay its implementation or result in its invalidation3. Therefore, the enforcement of the ban and the consequences for violating it may vary depending on the outcome of these legal challenges3. As always, employers should consult with a legal professional for the most current and applicable information.
How can employees report violations of the ban?
Once the Federal Trade Commission’s (FTC) ban on non-compete agreements becomes effective, employees can report suspected violations of the rule to the FTC’s Bureau of Competition12. Here’s how:
- Email: Employees can send an email to
noncompete@ftc.gov12. The email should include information about the suspected violation12.
Before reporting a violation, it’s important for employees to gather as much evidence as possible. This could include copies of the non-compete agreement, any related correspondence, and any other relevant documents.
Please note that while the FTC does investigate reports of violations, they do not resolve individual complaints12. Therefore, employees who believe their rights have been violated may also want to consult with a legal professional to explore their options for individual recourse. It’s always a good idea to seek legal advice when dealing with complex employment issues.
What should employees do if they are currently bound by a non-compete agreement?
If employees are currently bound by a non-compete agreement, there are several steps they can take:
- Understand the Agreement: Employees should thoroughly read and understand the terms of the non-compete agreement1. They should be aware of the restrictions it imposes, such as the duration of the agreement, the geographical area it covers, and the specific activities it prohibits1.
- Consult a Legal Professional: It’s advisable for employees to consult with a legal professional. A lawyer can help interpret the agreement, assess its enforceability, and advise on potential legal remedies1.
- Negotiate with the Employer: If the non-compete agreement seems overly restrictive, employees might be able to negotiate its terms with their employer1. This could involve reducing the duration of the agreement, narrowing its geographical scope, or limiting the activities it covers1.
- Check the Law: Some states have laws that limit the enforceability of non-compete agreements1. Employees should check the laws in their state to see if they provide any protections1.
- Report Violations: If the FTC’s ban on non-compete agreements is in effect and an employer attempts to enforce a non-compete agreement, employees can report the violation to the FTC2.
Remember, every situation is unique, and this advice may not apply to all circumstances. It’s always a good idea to seek legal advice when dealing with complex employment issues.
Last updated on: May 6, 2024
