In a decisive step aimed at protecting workers, the Federal Trade Commission (“FTC”) has ruled to invalidate noncompete clauses for all employees in the coming weeks. This new rule applies to virtually all classes of employees and will fundamentally revise the rulebook by which employees and employers interact.
Who is Affected?
The new rule will prohibit the utilization of all new noncompete agreements for workers, independent contractors and senior executives. An estimated 18% of the country’s workforce (30 million people) are restricted by noncompete clauses and by banning them, the FTC says that it hopes to stimulate the economy and businesses by:
- Allowing for new business formation. The FTC estimates a “2.7% increase in the rate of new firm formation, resulting in an additional 8,500 new businesses created each year.”
- Encouraging more innovation. More startups and a freer flow of ideas mean more patents each year. Some experts estimate between 17,000 and 29,000 more patents every year.
- Increasing worker’s earnings. As workers have the opportunity and freedom to move between businesses and leverage their skills and expertise, wages are expected to grow over the next decade by at least $400 billion.
What About Existing Noncompete Clauses?
Some had hoped that the rule would simply ban new noncompete clauses and leave the existing ones untouched. However, in a bold move, the FTC chose to ban all new and existing noncompete clauses with an exception made for senior executives.
A “senior executive” as defined by the FTC is anyone employed by the business who earns more than $151,164 who are in a “policy-making position”. Given their insider knowledge of business practices and standing, existing noncompete clauses can continue for senior executives, but new ones will be banned.
The rule also does not apply to noncompete agreements included against a seller in a business-sale transaction where these kinds of agreements are commonly used.
The new FTC rule is likely to face legal challenges, so the final chapter on non-compete agreements likely has not been written. However, if and when a version of this rule passes legal scrutiny, it will represent a seismic change to the way businesses and employees function together. If you own a business, utilize noncompete agreements, or are subject to a noncompete agreement and would like to discuss how this new rule may affect you or your employees, please contact James P. McGraw, Partner at The Lynch Law Group at jmcgraw@lynchlaw-group.com.
