The Federal Trade Commission (FTC) on Tuesday finalized a rule to ban workplace noncompete agreements nationwide. The U.S. Chamber of Commerce immediately said it would sue the agency to prevent the rule from taking effect.
The FTC proposed the rule in January 2023, saying the change would create an estimated 8,500 new startup businesses annually. The rule is expected to increase annual average wages by $524 and lower health-care costs by up to $194 billion over the next decade.
The rule codified the FTC’s view that noncompete agreements are an unfair method of competition, and therefore a violation of Section 5 of the FTC Act.
FTC Chairman Lina Khan said, “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.”
The FTC said the rule is expected to boost annual patents between 17,000 and 29,000 annually over the next decade.
U.S. Chamber of Commerce President and CEO Suzanne Clark said the rule was unlawful.
“The chamber will sue the FTC to block this unnecessary and unlawful rule,” she said, “and put other agencies on notice that such overreach will not go unchecked.”
An estimated 30 million workers—nearly one in five Americans—are subject to a noncompete agreement. The rule would take effect 120 days after publication in the Federal Register, likely in the last week of August. A lawsuit by the Chamber of Commerce would likely seek to delay the rule’s effective date until the legal challenge is resolved.
If the rule does take effect, existing noncompete agreements will no longer be enforceable. The only exception will be for senior executives, a change the FTC made from the original proposal. Senior executives are defined as workers making at least $151,174 annually and who are in policy-making positions.
The rule bans employers from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers must notify workers bound by an existing noncompete that they will not enforce the noncompete agreement.
Without noncompetes available to businesses, the FTC said several alternatives remain to protect proprietary information. Most prominent are non-disclosure agreements, which the FTC said over 95% of workers with a noncompete agreement already have.
The senior executive exemption was one of two changes made to the proposed rule. The other eliminated a proposal to require employers to formally rescind existing noncompetes. Under the final rule, employers simply have to provide notice to workers that their noncompete agreement will not be enforced.
Clark said the rule was a “blatant power grab” by the FTC.
“Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules,” Clark said. “Noncompete agreements are either upheld or dismissed under well-established state laws governing their use. Yet, today, three unelected commissioners have unilaterally decided they have the authority to declare what’s a legitimate business decision and what’s not by moving to ban noncompete agreements in all sectors of the economy. This decision sets a dangerous precedent for government micromanaging business and can harm employers, workers and our economy.”
The FTC voted 3-2 to finalize the rule. Republican commissioners Melissa Holyoak and Andrew Ferguson opposed the rule. Written statements were not yet released.
