The Federal Trade Commission issued a final rule that bans the use of many non-compete agreements by employers. The FTC determined these agreements suppress wages, stifle innovation by limiting workforce mobility, and make it harder for new businesses to launch. The final rule becomes effective 120 days after publication in the Federal Register. While the policy is popular with labor groups, many business owners are left wondering what this means for them.

According to the FTC's estimates, eliminating non-compete clauses will spur a 2.7% increase in the formation of new companies each year, amounting to more than 8,500 additional startups annually. They project the rule will boost average worker earnings by around $524 per year and could cut U.S. health care costs by up to $194 billion over the next decade. 

The FTC determined non-compete agreements represent an unfair method of competition that negatively impacts labor markets (nearly one in five Americans are subject to a non-compete) by preventing employees from switching employers or starting new businesses. They also found non-competes harm product and service markets by inhibiting new business formation and innovation, while contributing to increased market concentration and higher consumer prices.

While the final rule invalidates the majority of existing non-compete agreements after its effective date, it makes an exception for "senior executives." Companies can continue enforcing current non-competes for this group, defined as workers earning more than $151,164 annually in policy-making roles. However, employers are prohibited from implementing any new non-compete clauses going forward, including those for senior executives.

For non-senior staff currently bound by a non-compete, companies must provide notice stating the agreement will no longer be enforced against those workers on or by the effective date of the final rule. The FTC has provided model language firms can use to communicate this.

Notably, the final rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity. In addition, the final rule does not apply where a cause of action related to a non-compete accrued prior to the effective date. The final rule further provides that it is not an unfair method of competition to enforce or attempt to enforce a non-compete or to make representations about a non-compete where a person has a good-faith basis to believe that the final rule is inapplicable. 

The 3–2 commissioner vote indicates there was some dissent on the new regulation and it is worth noting that business groups, led by the US Chamber of Commerce, have already filed suit challenging the final rule. 

The FTC argues there are alternative mechanisms, like non-disclosure agreements and trade secret laws, that allow companies to protect proprietary information without needing non-competes (it is estimated more than 95% of workers are subject to non-disclosure agreements). The FTC recommends employers instead focus on improving compensation and workplace conditions to retain talent competitively.

Overall, this rule represents a major shift, with a stated goal aimed at boosting competition, entrepreneurship, and economic dynamism by curtailing the widespread use of non-compete covenants that, in the eyes of the FTC, unduly burdens worker freedom and mobility. Business owners must take appropriate steps to ensure they are prepared to implement the requisite changes to their business required by this ruling by the time it becomes effective.

To read more about how this will affect the health care industry, click here for an excerpt from the final ruling.