FTC bans non-compete clauses

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Commission votes 3-2 to nullify contractual clauses impacting an estimated 18% of US workers

The Federal Trade Commission today published a final rule banning non-compete clauses in contracts.

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned,” FTC Chair Lina M. Khan said in announcing the rule.

“The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

The commission voted 3-2 in favor of the rule, with Republican commissioners Melissa Holyoak and Andrew N. Ferguson objecting.

The FTC found that trade secret laws and non-disclosure agreements were already effective measures for companies to protect their proprietary and sensitive information without resorting to non-compete clauses.

Under the new rule, existing non-compete clauses are still valid for senior executives in policy-making positions who make substantially more than $150,000 a year, but companies cannot make or enforce new non-competes with them once the rule goes into effect. (That will be 120 days from the rule’s publication in the Federal Register, but it has not appeared there as of this writing.)

The FTC first proposed the rule in January of 2023. It received 26,000 public comments on the proposed rule, with more than 25,000 of them supporting the measure.

An estimated 18% of US workers are currently subject to non-compete clauses.

“Noncompetes are a widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business,” the FTC said.

“Noncompetes often force workers to either stay in a job they want to leave or bear other significant harms and costs, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave the workforce altogether, or being forced to defend against expensive litigation.”