US Federal Trade Commission votes to ban noncompete agreements

The FTC estimates that the final rule banning noncompetes will lead to new business formation growing by 2.7% per year. (Photo: Alamy)

The US Federal Trade Commission (FTC) voted 3-2 this week to ban noncompete agreements, measures which prohibit workers from joining competing companies or starting competitive businesses for a prescribed period of time. 

The move aims to promote competition and protect freedom of workers to change jobs, as well as increase innovation and foster new business formation, according to the FTC.

Equipment rental companies regularly sign noncompete agreements when selling their business to consolidators, often going on to open new companies when the legal contracts expire. The latest move by the FTC could potentially affect the North American rental industry by shortening the turnround time between selling a business and opening a new one in the same market.

There are many ways noncompetes affect commerce in the US, from individual employees to technical advancement. 

“The FTC ban on non-compete agreements will certainly lead to increased job mobility in the rental equipment industry, as employees would have more freedom to change employers without facing legal repercussions,” said Mike Disser of RMC Consults LLC. “The NCA became popular in the late 1990s as industry consolidation was happening at a frantic pace. It was not uncommon for a sales representative to move from one rental company to another during this period of time. As the rental companies got larger, their legal departments did also, and NCA’s became the standard.

“Company’s began to include some sort of monetary consideration and learned how to construct the language better and not so broad in scope. This made them more enforceable and thwarted the ‘job-hopping’ to some degree.”

He added, “Rental company’s will need to use ‘special incentives’ to attract and retain its workforce rather than NCAs to prevent them from going elsewhere. Using creativity, I believe that rental companies will be just as successful at retaining their employees.”

FTC Chair Lina M. Khan stated the ban will benefit workers, and the economy; “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned. The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

The FTC estimates that the final rule banning noncompetes will lead to new business formation growing by 2.7% per year, resulting in more than 8,500 additional new businesses created each year. The final rule is expected to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and it is expected to lower health care costs by up to $194 billion over the next decade.

In addition, the FTC expects the final rule to help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years under the final rule.

“The birth of so many important foundational companies could not have happened, at least not in the same way or on the same timeline and definitely not in the same place, had it not been for the ability of entrepreneurs to spin out, start their own companies, or go to a better company,” John Lettieri, CEO of the Economic Innovation Group, a tech-backed think tank, told the Associated Press.

The U.S. Chamber of Commerce was reported to have said it will file a lawsuit to block the rule, accusing the FTC of overstepping its authority.

“Noncompete agreements are either upheld or dismissed under well-established state laws governing their use,” Suzanne Clark, the chamber’s CEO, was quoted. “Yet today, three unelected commissioners have unilaterally decided they have the authority to declare what’s a legitimate business decision and what’s not by moving to ban noncompete agreements in all sectors of the economy.”

Under the FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date. Existing noncompetes for senior executives - who represent less than 0.75% of workers - can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompetes against them.

The final rule will become effective in four months unless it is blocked by legal challenges.