FTC finalizes rule banning most employers from using noncompete clauses. But legal challenge is expected | CNN Business (2024)

FTC finalizes rule banning most employers from using noncompete clauses. But legal challenge is expected | CNN Business (1)

Around one in five US workers is bound by a noncompete clause in their current job, according to estimates from the Federal Trade Commission.

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The Federal Trade Commission on Tuesday voted to ban for-profit US employers from making employees sign agreements with noncompete clauses. Such a ban could affect tens of millions of workers.

President Joe Biden soon after the announcement said, “The FTC is cracking down on ‘non-compete agreements,’ contracts that employers use to prevent their workers from changing jobs even if that job will pay a few dollars more, or provide better working conditions. Workers ought to have the right to choose who they want to work for.”

The FTC’s decision was the result of a 3-to-2 vote among its five commissioners Tuesday afternoon. The two commissioners who dissented from the majority saidthey believed the rule to be “unlawful” and “won’t survive legal challenge.” The US Chamber of Commerce has already said it will sue the FTC as early as this week for what it views as the agency exceeding its administrative authority.

What the final rule will do

The FTC estimates that 30 million people – one in five US workers – are bound by a noncompete clause in their current jobs. And for most of them, the agency asserts, such a clause restricts them from freely switching jobs, lowers wages, stifles innovation, blocks entrepreneurs from starting new businesses and undermines fair competition.

The final rule is a somewhat narrower version of the proposed rule that the agency put out for public comment in January of 2023.

More salaried workers will be eligible for overtime pay. Maskot/Digital Vision/Getty Images Related article Millions more salaried workers will be eligible for overtime pay under final Biden administration rule

It will ban for-profit employers from issuing new noncompetes to anyone.

And – with one exception – it makes currently existing noncompete agreements unenforceable after the rule’s effective date, which is set at 120 days from the rule’s publication in the Federal Register.

The rule, however, does allow currently existing noncompete agreements for senior executives to remain in force. Senior executives are defined as workers earning more than $151,164 annually who also are in a “policy-making position.”

An FTC staff member presenting the final rule to the commissioners during Tuesday’s meeting characterized noncompete agreements as “exploitative and coercive” for employees other than senior executives. Typically, senior executives are more likely to have a lawyer represent them in contract negotiations and secure compensation in exchange for signing a noncompete agreement. Whereas rank-and-file employees normally don’t negotiate such agreements, which may be presented to them along with other paperwork on their first day on the job.

The FTC contends that businesses seeking to protect their trade secrets and other confidential information can do so through the use of confidentiality clauses.

The ban would apply nationwide, overriding state laws regarding noncompete agreements. Currently three states (California, North Dakota and Oklahoma) plus Washington, D.C., already have near-complete bans on the books, while some other states – such as Colorado, Maryland, Oregon and Rhode Island – allow them but only within certain parameters, such as limiting them to high-wage earners, saidStefanie Camfield, assistant general counsel atEngage PEO, a human resources services firm.

The FTC estimates that its ban would boost wages and benefits by up to $488 billion over a decade.

Legal challenges may delay implementation

Employment lawyers expect there to be legal pushback from employers and business groups that may delay enforcement of the rule while it is challenged in court, and possibly prevent it from ever going into effect if those suing the FTC prevail.

Daryl Joseffer, chief counsel of the U.S. Chamber’s Litigation Center,characterized the FTC rule banning noncompetes as an “administrative power grab.” “They’re trying to regulate a century-old business practice across the entire economy,” Joseffer said.

If the rule is allowed to stand, it opens “a pandora’s box, where they can micromanage any aspect of the economy,” the Chamber’s chief policy officer, Neil Bradley, asserted.

In December of last year, New York State Governor Kathleen Hochul vetoed a bill passed by the state legislature to completely ban noncompete agreements in that state.

What employees should know now

A nationwide ban on noncompete clauses can make things easier for rank-and-file workers who want to change jobs and not fear retaliation from their former employer.

“Having a bright line saying you can’t do it at all would be a major help to employees,”said employee-side attorney Anne Clark atVladeck, Raskin & Clark P.C.

But unless and until a nationwide ban goes into effect, any employee who has already signed a noncompete or is being asked to do so should understand the contours of it.

“Understand what you’re being asked to sign. And if you don’t, ask questions,” said Amanda Wait, a partner at the law firm DLA Piper and a former lawyer with the FTC.

You might start by checking the particulars of the law in your state governing employee agreements and what, if any prohibitions there are on employers. You might also consult with an attorney to help you interpret your noncompete, since courts may use a lot of different factors in determining whether a noncompete is unfairly restrictive, Clark said.

This story has been updated with additional information.

FTC finalizes rule banning most employers from using noncompete clauses. But legal challenge is expected | CNN Business (2024)

FAQs

FTC finalizes rule banning most employers from using noncompete clauses. But legal challenge is expected | CNN Business? ›

FTC votes to ban most employers from using noncompete clauses

noncompete clauses
In contract law, a non-compete clause (often NCC), restrictive covenant, or covenant not to compete (CNC), is a clause under which one party (usually an employee) agrees not to enter into or start a similar profession or trade in competition against another party (usually the employer).
https://en.wikipedia.org › wiki › Non-compete_clause
. But legal challenge is expected. Around one in five US workers is bound by a noncompete clause in their current job, according to estimates from the Federal Trade Commission.

Is the FTC going to ban non-compete agreements? ›

The Federal Trade Commission (FTC) issued a final rule on April 23 banning noncompete clauses nationwide. Generally, noncompete agreements restrict employees who leave a job from working in that field for a specific time period in a certain geographic area.

What is the rule to ban noncompete clauses? ›

On April 23, 2024, the Federal Trade Commission (FTC), in a 3-2 vote, issued a final rule that bans noncompete clauses between workers and employers as “unfair method[s] of competition” under Section 5 of the FTC Act, subject to only a few exceptions.

What is Section 5 of the FTC Act non-compete? ›

Section 5 prohibits “unfair methods of competition” (UMC) and empowers the FTC to enforce that prohibition through adjudication. Section 6 is titled “Additional powers of Commission.” It confers a range of authorities, most of which involve investigations and the publication of reports.

Can a company prevent you from working for a competitor? ›

Although non-compete agreements are unenforceable in California, confidentiality agreements are enforceable.

Will non-compete be banned in 2024? ›

On April 24, 2024, the U.S. Federal Trade Commission (FTC) promulgated its final rule prohibiting non-competes for most workers in the United States (the “Final Rule”).

Are non-competes going to be banned? ›

On April 23, 2024, the FTC announced its Final Non-Compete Clause Rule (“Final Rule”), which bans post-employment non-compete clauses between employers and their workers.

What voids a noncompete agreement? ›

California has a long-standing public policy favoring open competition and employee mobility, codified in Section 16600, which generally voids “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.”

What is the FTC final rule for noncompete? ›

Under the final Noncompete Rule, the FTC adopts a comprehensive ban on new noncompetes with all workers, including senior executives. The final rule provides that it is an unfair method of competition—and therefore a violation of Section 5—for employers to enter into noncompetes with workers.

What states have banned non-competes? ›

Choropleth map showing California, Minnesota, North Dakota and Oklahoma have full bans on noncompete agreements. Nine states and D.C. have restrictions on noncompetes based on an employee's income level. 25 states have other restrictions on noncompetes while 12 states have no restrictions.

What is a fair non-compete agreement? ›

The agreement can't be unreasonable, vague, or ambiguous about activities. In other words, it needs to outline any restrictions to your future employment opportunities specifically, and it can't be so broad that you can't find a new job.

Is there a way around a non-compete clause? ›

Non-Competitive Activity at New Employer: One of the most straightforward ways to overcome a noncompete is by ensuring that your new role with a different employer is in a non-competitive capacity. If you're not engaging in activities that directly compete with your former employer's business, you may be in the clear.

Can I work for a competitor if I signed a non-compete in the USA? ›

It doesn't mean you can't work for a competitor; it simply means you can't use proprietary or confidential information you learned or obtained from the former employer with a new employer.

Can I sue my competitor? ›

If you can show that the claims made about your product's quality, ingredients, manufacturing process, or other elements of your business are false, you can sue the competitor that is making these claims. Your business's trade secrets are protected by law, and considered your company's intellectual property.

What is the FTC decision on noncompetes? ›

The Federal Trade Commission (FTC) voted 3-2 on April 23 to ban non-compete agreements for workers in for-profit companies — a decision that will apply to many employed physicians.

What is the FTC cancellation law? ›

Cooling-off Rule is a rule that allows you to cancel a contract within a few days (usually three days) after signing it. As explained by the Federal Trade Commission (FTC), the federal cooling-off rules gives the consumer three days to cancel certain sales for a full refund.

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