Tens of millions of noncompete clauses included in employee contracts nationwide will be null and void by about Labor Day under a final rule issued Tuesday by the Federal Trade Commission (FTC).
The rule to largely ban noncompete clauses in the United States is already under fire, after a lawsuit filed Wednesday by business advocates cast some doubt on its future.
Noncompete clauses are legal contracts employees are required to sign, in fields ranging from baking to computer technology, that prohibit them from working for another employer in the same field for a certain amount of time. An estimated 30 million employees are subject to noncompete clauses, the FTC said in a press release announcing the rule.
The clauses stifle competition and violate Section 5 of the Federal Trade Commission Act, said FTC Chair Lina Khan, who made the ban a priority after President Joe Biden issued an executive order in 2021 directing the agency to address the matter.
Under the FTC’s rule, existing noncompete clauses will no longer be enforceable—except for those made with senior executives, which may remain in force until the contracts expire.
Employers must provide notice to workers that they are no longer bound by their noncompete contracts. The FTC provided model notice language in the final rule for employers to use.
Employers do not have to legally rescind existing noncompete language in their contracts with employees, as the FTC had originally proposed in January 2023.
Employers are prohibited from entering into new noncompete contracts with any employees, including senior executives, according to the final rule, which becomes effective 120 days after its publication in the Federal Register.
The rule defines senior executives as those earning $151,165 or more annually and who make policy decisions for the company. Nondisclosure agreements and trade secrets laws are effective alternatives employers may use to protect proprietary and sensitive information, the FTC said.
The clauses “keep wages low, suppress new ideas, and rob the American economy of dynamism,” Khan said in announcing the 3-2 vote in favor of the ban. The rule “will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market,” she said.
The FTC received more than 26,000 comments on the draft rule, 25,000 of which, it said, favored ending the practice of noncompete clauses used by employers.
The agency estimated banning noncompetes would create 8,500 new businesses each year and up to 29,000 new patents in the next 10 years, increase the average worker’s earnings by $524 per year, and cut federal health costs by up to $194 billion over the next 10 years.
New FTC Commissioners Melissa Holyoak and Andrew Ferguson voted against the rule.
The Chamber of Commerce has been a vocal opponent of limiting noncompetes. On Wednesday, the group, along with the Business Roundtable, filed suit against the rule in U.S. District Court for the Eastern District of Texas.
“The FTC’s action sets a dangerous precedent for government micromanagement and will harm employees, employers, and the economy,” the chamber said in announcing the suit.
The chamber is seeking to delay implementation of the rule until the case is decided.
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