The Federal Trade Commission (FTC) issued a definitive rule on April 23, 2024, that prohibits noncompete clauses nationwide to ensure the freedom of workers to change employment and promote competition. FTC Chair Lina M. Khan highlighted that noncompetes suppress wages, stifle innovation, and reduce economic dynamism. The FTC estimates the rule will increase new business formations by 2.7% annually, create over 8,500 new businesses each year, raise average worker earnings by $524 annually, and reduce healthcare costs by up to $194 billion over the next decade, and potentially increase the number of patents by 17,000 to 29,000 annually.
The FTC’s rule makes most existing noncompetes unenforceable, although noncompetes for senior executives earning over $151,164 annually can remain in force. Employers must inform affected workers that existing noncompetes will no longer be enforced. The rule follows a 90-day public comment period with over 26,000 comments, predominantly supporting the ban. The FTC determined that noncompetes violate Section 5 of the FTC Act by negatively affecting labor market competition, inhibiting efficient worker-employer matching, and increasing market concentration. Employers are encouraged to use alternatives like trade secret laws and non-disclosure agreements to protect proprietary information. The final rule will take effect 120 days after publication in the Federal Register.
