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FTC to ban noncompetes

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The Federal Trade Commission voted 3-2 Tuesday to issue a final rule that would prohibit the enforcement of most noncompete agreements.

According to draft text published by FTC, the rule provides that it is a violation of federal antitrust laws for employers to enter into noncompetes with workers on or after the rule’s effective date. Existing noncompetes with senior executives may remain in force, but those with other workers are not enforceable after the effective date.

The final rule will take effect 120 days from the date of publication in the Federal Register, meaning it in could be in force as soon as late August.

In a public meeting convened Tuesday to vote on the rule, Benjamin Cady, attorney at the FTC’s office of policy planning, said the agency estimated that approximately 1 in 5 U.S. workers is subject to a noncompete agreement, or about 30 million workers total. The commission said it received some 26,000 public comments in response to the proposed rule, with about 25,000 of these being supportive of the rule.

Cady said some of the public comments were submitted by workers who wanted to compete for better jobs or “strike out on their own and start new businesses,” but were prevented from doing so by noncompetes. He cited FTC estimates that a noncompete ban would increase worker earnings by $400 billion over a 10-year period, or $524 per worker per year.

“It’s so profoundly unfree and unfair for people to be stuck in jobs they want to leave, not because they lack better alternatives but because of noncompetes,” said Rebecca Slaughter, a Democratic commissioner who voted in favor of the rule. “This problem affects so many. It really affects all of us, even if no one in your family is subject to a noncompete.”

The component of the rule allowing existing noncompetes with senior executives to remain in force represents a change from FTC’s January 2023 proposed rule, and the rule defines “senior executives” as workers who earn more than $151,164 annually and who are in a “policy-making position.”

A policy-making position is defined, under the rule as:

  • A business entity’s president, chief executive officer or the equivalent.
  • Any other officer of a business entity who has policy-making authority.
  • Any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.

Additionally, “policy-making authority” is defined as final authority to make policy decisions that control significant aspects of a business entity or a common enterprise, FTC said. This authority does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of, or an affiliate of, a common enterprise.

“For example, many executives in what is often called the ‘C-suite’ will likely be senior executives if they are making decisions that have a significant impact on the business, such as important policies that affect most or all of the business,” FTC said.

The commission’s proposed rule drew backlash from employers last year, and employer-side attorneys who spoke with HR Dive at the time said that federal courts may decide that FTC does not have the authority to regulate noncompete agreements.

The rule’s announcement also led to speculation that employers might be able to consider alternatives to noncompetes in light of the proposed ban, and FTC did point to potential “less restrictive” alternatives Tuesday. Nondisclosure agreements, for example, could provide employers “well-established means to protect proprietary and other sensitive information,” it said in a press release announcing the vote.

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