Noncompete agreements have become a common practice in employment contracts in the United States, affecting around 30 million Americans. These agreements restrict employees from working for competitors or starting their own businesses within a certain time period and geographic location after leaving a job. Many employees only realize the consequences of these agreements when they try to move on to a new job. The Federal Trade Commission (FTC) received thousands of public comments on proposed bans on noncompetes in January 2023. Professionals shared stories of being trapped in toxic work environments and forced to uproot their lives due to these agreements. The FTC ultimately voted 3-2 to ban noncompetes nationwide, citing them as an unfair method of competition and estimating that the ban would increase workers’ wages by billions of dollars over the next decade.
The ban on noncompete agreements will impact all workers, including senior executives, once it goes into effect. There is no salary threshold for this ban, and even independent contractors will be covered. However, employees of nonprofit organizations and noncompetes made during the sale of a business are exempt from the rule. Existing noncompetes will no longer be enforceable once the ban goes into effect, and employers must provide clear notice to affected employees. The ban will go into effect 120 days after being published in the federal register, likely by mid-August, but legal challenges are expected from firms and trade groups seeking to delay its implementation.
Employers have used noncompetes to protect trade secrets and customer relationships, but critics argue that these agreements suppress wages and limit employee mobility. Businesses claim that noncompetes are necessary to prevent “free-riding” and protect vital interests. The U.S. Chamber of Commerce plans to sue the FTC over the ban, calling it a dangerous precedent for government interference in business operations. Without noncompetes, employers may turn to other tactics like retention bonuses, loan forgiveness, confidentiality restrictions, and nonsolicitation bans to retain employees.
States like California, which have already banned noncompetes, have seen increased entrepreneurship and venture capital investment. Banning noncompetes shifts the power dynamic between employers and employees, leading to more incentives for employees to stay, such as stock options and innovation. Employees have more leverage to leave toxic work environments without fear of being sued for violating noncompete agreements. Employees can also use the impending FTC ban on noncompetes as leverage to negotiate their way out of existing agreements. Overall, the ban on noncompetes is seen as a positive step towards protecting workers’ rights and promoting a fair and competitive job market.
