On Tuesday, the Federal Trade Commission (FTC) voted 3-2 to ban employer noncompete agreements, a contract that employers require some workers to sign stating they cannot work for a competing company for a set period of time after their employment with the company is over.
According to the agency, about one in five workers – or 30 million people – is currently subject to a non-compete clause.
“Noncompete clauses keep wages low, stifle new ideas, and rob the American economy of dynamism, including the more than 8,500 new startups that would be created each year once noncompetitives were banned,” said FTC Chairwoman Lina M Khan in a company statement. . “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”
Related: FTC proposes to ban non-compete agreements
If you are currently subject to a non-compete clause, it will no longer apply to most US workers as of the effective date of the rule, which is 120 days after publication in the Federal Register.
The exception, however, is for senior executives who are bound by existing non-compete agreements, although employers are not permitted to force or involve senior executives in new non-compete agreements.
According to the FTC’s new ruling, senior executives are defined as “workers who earn more than $151,164 per year and who hold political positions.”
Employers will now also have to notify any existing employees with non-competitive people who are not senior managers that they are no longer bound to their agreements.
The Commission originally outlined a proposal to ban contractual agreements in January 2023, defining a non-compete agreement at the time as a contract that “has the effect of prohibiting the worker from seeking or accepting employment with a person or from managing a company after the termination of the worker’s employment relationship”. employment relationship with the employer.”
By banning non-competitive activities nationwide, the agency estimates that new business creation will increase 2.7% annually, the average worker’s annual earnings will increase by $524, and healthcare costs will drop by $194 billion over the next 10 years.
“Noncompete is a widespread and often exploitative practice that imposes contractual conditions that prevent workers from taking a new job or starting a new business,” the FTC said in a statement. “Noncompetes often force workers to stay in the jobs they want to leave or incur other significant harms and costs, such as being forced to move to a lower-paying sector, being forced to relocate, being forced out of the workforce altogether , or forced to defend themselves from costly litigation.”
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Once the rule takes effect, employees who believe they have been subject to a violation of applicable law can report their current or former employer by emailing noncompete@ftc.gov.