The Federal Trade Commission (FTC) announced its final rule banning noncompete contracts nationwide on April 23, 2024. It says the rule will protect workers, allowing them to change jobs, increase innovation and foster new businesses.

“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 noncompetes are banned,” said FTC Chair Lina M. Khan. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

By banning noncompetes, the FTC estimates new business formation will grow by 2.7% per year, resulting in more than 8,500 additional new businesses created each year. It is also expected to result in higher earnings for workers, with estimated earnings increasing for the average workers by an additional $524 per year. It is also expected to lower healthcare costs by up to $194 billion over the next decade. In addition, the FTC expects it to help drive innovation, leading to an estimated increase of 17,000 to 29,000 more patents each year for the next 10 years under the final new rule.

Noncompetes impose contractual conditions preventing workers from taking a new job or starting a new business. According to the FTC, 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 relocate, or being forced to leave the workforce altogether, or being forced to defend against expensive litigation. It is estimated that 30 million workers – nearly one in five Americans – are subject to a noncompete.

After the FTC final rule’s effective date, existing noncompetes for majority of workers will no longer be enforceable. Senior level executives under existing noncompetes can remain in force under the FTC’s final rule, but employers are banned from entering into or attending to enforce any new noncompetes, even if they involve senior executives. Employers will be required to provide notice to workers, other than senior executives, who are bound by an existing noncompete that they will not be enforcing any noncompetes against them.

In January 2023, the FTC issued a proposed rule which was subject to a 90-day public comment period. The FTC received more than 26,000 comments on the proposed rule, with more than 25,000 comments in support of the FTC’s proposed ban on noncompetes. The comments informed the FTC’s final rulemaking process, with the FTC carefully reviewing each comment and making changes to the proposed rule in response to the public’s feedback.

In the final rule, the Commission has determined that it is an unfair method of competition, and therefore a violation of Section 5 of the FTC Act, for employers to enter into noncompetes with workers and to enforce certain noncompetes.

The Commission found that noncompetes tend to negatively affect competitive conditions in labor markets by inhibiting efficient matching between workers and employers. The Commission also found that noncompetes tend to negatively affect competitive conditions in product and service markets, inhibiting new business formation and innovation. There is also evidence that noncompetes lead to increased market concentration and higher prices for consumers.