Earlier this week, the Federal Trade Commission (FTC) issued a final rule to ban noncompete clauses nationwide, and it is set to be a game changer for American workers and businesses. This bold move is aimed at promoting competition, protecting the freedom of workers to change jobs, fostering innovation, and encouraging new business formation.
What Is A Noncompete?
A noncompete agreement is used by companies to prevent employees who have access to sensitive or proprietary information from taking that information to a competitor or using it to start their own competing business. Companies often invest significant resources into training and developing their employees, so they want to protect that investment by preventing those employees from immediately going to work for a rival firm.
The Impact Of The Ban
The FTC estimates the ban on noncompetes will lead to a significant increase in new business formation, with more than 8,500 additional new businesses created each year. This is projected to result in a 2.7% annual growth in new business formation. In addition, the rule is expected to drive innovation, potentially leading to an average increase of 17,000 to 29,000 more patents each year for the next decade.
Higher earnings and lower health care costs
The ban is also anticipated to positively impact workers’ earnings, with the average worker estimated to see an additional $524 per year. Additionally, the rule is expected to lower health care costs by up to $194 billion over the next 10 years.
Worker freedom and opportunity
The ban on noncompetes is a crucial step toward ensuring that American workers have the freedom to pursue new job opportunities, start their own businesses, and bring fresh ideas to the market. By eliminating the barriers imposed by noncompetes, workers will have greater flexibility and autonomy in their careers.
Impact On Workers
Noncompete clauses have been widely criticized for keeping wages low, stifling creativity, and restricting the dynamism of the American economy. An estimated 30 million workers (one in five Americans) are currently subject to noncompetes. These clauses often force workers to either remain in undesirable jobs or face significant hardships and costs if they seek to change employment.
Prohibiting Noncompetes
Under the new rule, existing noncompetes for the vast majority of workers will no longer be enforceable. While existing noncompetes for senior executives can remain intact, employers are banned from entering into or attempting to enforce any new noncompetes, even for senior executives. Employers will be required to notify workers bound by an existing noncompete that it will not be enforced against them.
Public Feedback And Final Rulemaking
The FTC’s decision to ban noncompetes was informed by a substantial public comment period, which over 25,000 comments expressed support for the ban. The Commission reviewed each comment and adjusted the proposed rule in response to public feedback.
Alternatives To Noncompetes
The Commission identified alternatives to noncompetes that enable firms to safeguard their investments without resorting to noncompete agreements. These alternatives include trade secret laws and non-disclosure agreements (NDAs), which provide employers with established means to protect proprietary information. In addition, employers can compete for workers’ services by improving wages and working conditions.
Finalizing The Rule And Ensuring Compliance
The final rule allows existing noncompetes for senior executives to remain in force but prohibits the enforcement of new noncompetes with senior executives. Furthermore, the requirement for employers to formally rescind existing noncompetes has been eliminated to streamline compliance.
The rule will become effective 120 days after publication in the Federal Register. Employers will be required to provide notice to workers constrained by existing noncompetes that these agreements will not be enforced in the future. To facilitate compliance, the Commission has included model language in the final rule for employers to communicate with workers.
Once the rule is effective, market participants can report suspected violations to the Bureau of Competition by emailing noncompete@ftc.gov.
Partner With GMS To Stay Up To Date
Navigating the complex and ever-changing employment laws and regulations can be a significant challenge for many businesses. That’s where a trusted professional employer organization (PEO) like GMS can make all the difference for your company. By outsourcing HR functions to GMS, companies can ensure they remain compliant with the new rules such as the FTC’s ban on noncompetes while also benefiting from our comprehensive suite of services and expert guidance. With GMS in your corner, you can focus on growing your business. Reach out to our experts today!