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On April 23, 2024, the Federal Trade Commission (FTC) enacted a rule banning noncompete agreements for nearly all employees. The rule goes into effect 120 days after the rule is published in the Federal Register—maybe, more on that later.

But first, what is a noncompete, and why is everyone concerned with it?

A noncompete clause is defined by the FTC as “[a] term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from either seeking or accepting work after the conclusion of employment, or operating a business after the conclusion of employment.”

Noncompete clauses and agreements have been around for decades. Initially, companies entered into these agreements with senior executives to prevent high-level employees from taking trade secrets or confidential and proprietary information to competitors. As time passed, employers began requiring all employees to enter into these agreements (including, infamously, Jimmy John’s, who required sandwich-makers to sign noncompete agreements until public pressure forced the company to reconsider this policy).

The FTC’s newest rule bans post-employment noncompete clauses and agreements for nearly all workers. The rule states that all such clauses constitute an unfair method of competition and are therefore unlawful. Further, the new rule requires employers to rescind current noncompete clauses that are subject to the ban within 45 days of the effective date of the rule.

However, the FTC rules carved out two exceptions to the ban.

  1. First, current noncompete agreements will remain enforceable for senior executives in policy-making positions who earn a minimum of $151,164 annually, while also applying to new agreements with senior executives.
  2. Second, noncompete clauses apply that are part of a “bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” To be eligible for the exemption, the business owner must have at least a 25% share in the selling business.

So, what are the positives?

Noncompete clauses, at their core, prevent employees from accepting a new job (or building a new business) that will compete with their current employer. A noncompete regularly has a time limit, such as twelve months, or a geographic threshold; this means that an employee would have to find a new profession or type of work for twelve months before being able to return to their chosen field, or move a sufficient distance away. Many employees cannot afford to sit on the sidelines for a year waiting for the clock to run out on a noncompete.

Proponents of the ban say limiting an employee’s ability to move from one job to the next when they choose necessarily depresses wages. Employees who can’t afford to change fields or move outside of their local area must stay in a current role, and therefore do not have the leverage to negotiate for higher pay to the same degree as other employees when seeking a new role.

For BIPOC workers specifically, this means that wages already lower than that of their white counterparts will remain lower. Eliminating noncompete clauses will allow BIPOC workers to have more leverage with current employers and pursue higher wages from new employers or by starting businesses. This is the latest in the series of actions helping to empower BIPOC workers, evening the playing field around salary negotiations.

(The importance of such legislative wins is thrown into sharper relief beside recent headwinds against equitable practices, such as the US Supreme Court’s roll-back of affirmative action in higher education on June 29, 2023, despite reputable evidence demonstrating diversity improves learning outcomes for all students, with benefits extending beyond graduation.)

Legislation that prevents prospective employers from making inquiries into a candidate’s current salary and requires job postings to contain accurate salary ranges additionally helps candidates looking for new roles; the noncompete ban, however, more specifically helps current employees. Employers will no longer be able to unfairly lock current employees into a role, explicitly or implicitly. Current employees will be able to be more mobile, which often leads to higher pay and more competitive benefits; they will also be able to leave and start new businesses, which helps to facilitate healthy competition and increased innovation.

But will it happen?

The rule is set to officially go into effect 120 days after its publication in the Federal Register. However, the US Chamber of Commerce and the Business Roundtable have already filed suit in Texas. Additionally, a tax group, Ryan, has filed suit in Texas against the FTC. These lawsuits are asking the courts to issue a stay to prevent the rule from going into effect; more suits are expected to come. If any of the courts issue such a stay or preliminary junction until after any or all of the cases are decided, then it will be much longer than 120 days before the noncompete bans take effect.  

Regardless, as an employer or business owner, it is worth asking yourself, are you doing your responsible best to support the livelihoods of the people that make yours possible? Beyond legislation, a world that’s fairer for all starts with a change in the perspective of the people who comprise it.