The Federal Trade Commission has outlawed the use of most noncompete clauses, freeing workers from restrictive agreements that often hampered their ability to change jobs or create new businesses in the same industry.
In a 3-2 vote, the commission issued a final rule, first proposed in 2023, that voids nearly all noncompete clauses and mandates that businesses that employ them tell workers that the clauses will no longer be enforceable 120 days after publication in the Federal Register.
The rule contains a draft letter that companies using noncompete clauses must send to affected workers. The letter makes it clear that they are allowed to seek and accept a job with any company or person, even if the firm is a competitor, and that they can start their own business, even if it competes with their current firm.
Some in the funeral service industry have used noncompete clauses, which can prevent licensed funeral directors from working in the same area as their previous employer or from opening a business that could be in direct competition. Some licensed funeral directors have hired counsel in attempt to break the clauses.
Specifically, the rule says it is an “unfair method of competition” for someone to:
- Enter into or attempt to enter into a noncompete clause
- Enforce or attempt to enforce a noncompete clause
- Represent that the worker is subject to a noncompete clause
Overall, the new rule effects more than 30 million workers in the United States, including more than 3 million in New Jersey. The FTC found that the clauses depress salaries for workers and restrict their ability to find advancement in their industries.
The FTC said that current noncompete clauses for senior executives, who account for less than 1 percent of workers, will not be affected by the new rule. The commission concluded that senior executives are “less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers subject to existing noncompetes,” the rule states. Businesses, however, are forbidden from entering into new noncompete agreements with senior executives.
Also, the rule states that its restrictions on noncompetes do not apply in situations where a person enters into one as part of the sale of a business from one partner to another. Noncompetes with franchisees are also exempt from the rule.
Previously, regulations concerning noncompete clauses were a patchwork, with a few states banning them outright. But the new FTC rule creates a high bar for the use of clauses, restricting them to relatively few, and mostly high paid, workers.
“It establishes, in the place of this mushy standard that exists in most states, a bright line,” Sandeep Vaheesan, the legal director at Open Markets Institute, told The Washington Post. “So everyone will know these contracts are illegal.”
Companies will still be able to use non-disclosure agreements and trade secret laws to protect proprietary information.
The FTC argued that the rule creates a more level playing field for employees who might be seeking advancement, better pay or a better work environment.
“The commission also finds that instead of using noncompetes to lock in workers, employers that wish to retain employees can compete on the merits for the worker’s labor services by improving wages and working conditions,” an FTC press release stated.