The Federal Trade Commission (FTC) recently announced a major win for workers nationwide with a final rule banning noncompete agreements. This policy shift is expected to create a ripple effect, boosting the economy, increasing innovation, and putting more money in workers’ pockets. However, as with any major policy change, this new rule is already expected to be challenged in court by stakeholders like the U.S. Chamber of Commerce. While it has not yet gone into effect, and may be delayed by pending litigation, being aware of this potential change is crucial.
What are Noncompete Agreements?
Noncompete agreements are contracts that prevent employees from taking a new job with a competitor or starting their own business in a similar field for a certain period after leaving their current position. These agreements have been widely criticized for limiting worker mobility and suppressing wages.
The Impact of the Ban
The FTC estimates that the ban on noncompetes will have several positive effects:
- Increased Business Formation: The rule is expected to lead to the creation of over 8,500 new businesses each year, fostering a more dynamic and competitive marketplace.
- Higher Wages: Workers are predicted to see an average annual wage increase of $524. With greater competition for talent, employers will likely have to offer more competitive salaries to retain and attract skilled workers.
- Lower Healthcare Costs:The FTC estimates that the ban could lead to healthcare cost reductions of up to $194 billion over the next decade. Increased worker mobility may lead to a healthier workforce as individuals have more freedom to find jobs that offer better health benefits.
- Innovation Boost:The ban is also expected to spur innovation. With fewer restrictions on where workers can take their skills and ideas, the potential for new inventions and business models is likely to increase.
The Path to Change
The FTC’s decision comes after a proposed rule garnered overwhelming public support during a 90-day comment period. The final rule takes into account feedback received, streamlining compliance for employers. Existing noncompetes for most workers will no longer be enforceable, while those for a small percentage of senior executives (earning over $151,164 annually) can remain in place. Employers are still prohibited from entering into any new noncompete agreements, even with senior executives.
Alternatives to Noncompetes
The FTC emphasizes that employers have other tools to protect their interests, such as trade secret laws and non-disclosure agreements (NDAs) which allow them to safeguard confidential information. Additionally, the commission encourages employers to focus on creating a positive work environment and offering competitive compensation to retain valuable employees.
The Road Ahead
The FTC’s final rule becomes effective 120 days after publication in the Federal Register. This means your existing noncompete agreement is still effective for now. Additionally, there may be further delays as the U.S. Chamber of Commerce sues to block this rule change, arguing that only Congress (rather than the FTC) has the authority to make such a change. However, this policy shift has the potential to significantly impact the American workforce, so stay tuned for further updates as we monitor this situation in the coming months.