Noncompete agreements in worker contracts will be banned under a final rule approved April 23 in a 3-to-2 vote by the Federal Trade Commission. Such agreements can restrict employees from working for a company’s competitors for a period of time within a specified geographic area after the worker leaves a company.

The FTC first proposed the ban on noncompetes in January 2023. In the final rule, the FTC determined that noncompete agreements represent an unfair method of competition.

“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,” FTC Chair Lina Khan said in a press release. “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.”

Employers have alternatives to noncompetes, such as trade secret laws and nondisclosure agreements, the FTC noted. In addition, it argued employers that wish to keep workers can improve wages and working conditions.

An estimated 30 million workers are subject to noncompetes.

Proponents argue doing away with noncompetes will provide a number of benefits, while opponents say the FTC is overstepping its bounds.  

The US Chamber of Commerce has vowed to sue the FTC to block the rule.

“Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules,” Suzanne Clark, president and CEO of the chamber, said in a press release. “Noncompete agreements are either upheld or dismissed under well-established state laws governing their use. Yet, today, three unelected commissioners have unilaterally decided they have the authority to declare what’s a legitimate business decision and what’s not by moving to ban noncompete agreements in all sectors of the economy.” The FTC’s vote sets a dangerous precedent and could harm employers, workers and the US economy, Clark said.

The final rule could also “seriously damage” staffing firms, as virtually all of them use such agreements, writes George Reardon, an attorney with longtime experience in the industry, in the Staffing Stream.

The final rule takes effect 120 days after publication in the Federal Register. It bans employment noncompete agreements with all workers, including senior executives, according to the FTC.

Companies with employees under existing noncompete agreements will have to notify workers that the noncompetes will not be enforced. There is an exception for senior executives, and existing noncompetes will still be enforceable. To be considered a senior executive, a workers would need to earn more than $151,164 annually and be in a policy-making position. Fewer than 1% of workers are estimated to be senior executives.

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

The final rule doesn’t apply to noncompetes entered into by a person in the sale of a business entity.

Even before the final rule, three states previously did not enforce noncompete agreements: California, North Dakota and Oklahoma.