In a significant move, the Federal Trade Commission (FTC) has enacted a final rule on April 23 that prohibits noncompete clauses across the country. These clauses, commonly found in employment contracts, typically restrict departing employees from engaging in similar work within a specific time frame and geographic area.
The commission, with a 3-2 vote, finalized the rule after determining its inconsistency with Section 5 of the FTC Act, which bars unfair or deceptive practices affecting commerce. Effective 120 days post its publication in the Federal Register, this regulation marks a pivotal shift in employment practices.
Under this new ruling, the majority of noncompete agreements are banned, disrupting practices where, for instance, professionals like veterinarians may find themselves constrained from working nearby if they transition to new roles. These agreements also impede practice owners from departing and establishing competing ventures, thereby retaining clients.
Shortly following the announcement, the U.S. Chamber of Commerce and other business entities filed a lawsuit against the FTC in a Texas federal court, challenging the rule’s legitimacy. They argue that such regulatory measures overstep the commission’s authority and jeopardize the competitiveness of American businesses.
Key provisions of the final rule include the prohibition of new noncompetes for for-profit employers, with exceptions only for a small fraction of senior executives. Additionally, existing noncompetes will no longer hold enforceability for the majority of workers, except for specific circumstances such as those tied to business sales or existing legal disputes.
Employers are mandated to notify affected workers about the nullification of their noncompete agreements, granting them the freedom to pursue alternative employment opportunities or entrepreneurial ventures. With an estimated 30 million Americans currently bound by these agreements, this regulatory action is poised to unlock economic dynamism and promote innovation.
FTC Chair Lina M. Khan emphasized the detrimental impact of noncompete clauses on wages, innovation, and economic growth, highlighting the rule’s potential to foster job mobility and entrepreneurial activity.
This final rule, originating from a proposed rulemaking in January 2023, garnered extensive public feedback, reflecting widespread concern over the adverse effects of noncompete agreements on various sectors, including healthcare.
While states like California, Minnesota, North Dakota, and Oklahoma have already banned noncompete agreements for employees, the FTC’s nationwide intervention seeks to address the legal complexities and disparities arising from varying state regulations.
As legal battles loom and debates over regulatory authority intensify, the outcome of this rule promises to reshape the landscape of employment practices, safeguarding workers’ rights and fostering a more competitive business environment.
