Editor’s Note: This story originally appeared on The Penny Hoarder.
On April 23, the Federal Trade Commission (FTC) implemented a ban on noncompete clauses for most U.S. workers.
The ban, which is likely to face legal challenges, prevents employers from putting noncompete clauses into new employment agreements. Most existing noncompetes also go away.
But what is a noncompete clause, and how does this FTC decision impact you? We’ll break it down.
How Noncompete Clauses Affect Workers
A noncompete clause is a “contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends,” according to the FTC.
This effectively, as the name implies, prevents you from becoming the employer’s competition.
The clauses can make it hard for workers to find a new job in their field. They can make employees feel trapped in their current role, regardless of whether they’re unhappy in their position or can’t make ends meet with their current salary.
How Noncompete Clauses Hurt Workers
Noncompetes can also stifle innovation, as they can prevent employees from launching a side hustle or business in their industry.
“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,” FTC Chair Lina M. Khan said in a statement.
“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 its ban on noncompete clauses will encourage new business growth of 2.7% a year in the U.S. and generate 17,000 to 29,000 additional new patents annually. The average worker can expect to make more money ($594 a year) and see their health care costs go down because of the ban.
According to the FTC, 1 in 5 Americans (roughly 30 million workers) is currently subject to a noncompete clause.
What Does the Noncompete Clause Ban Mean for You?
The FTC’s ban on noncompete clauses isn’t a surprise. President Joe Biden issued an executive order more than two years earlier telling the FTC to investigate and ultimately put a stop to noncompete clauses in employment contracts.
In January 2023, the FTC proposed this major rule change and left it open to public comment.
The FTC received 26,000 comments — with 25,000 in favor of the change.
If you’re one of the estimated 30 million Americans whose employment contract has a noncompete clause, your employer can no longer enforce it.
You’ll be free to accept a job elsewhere in your field, even if the company is a competitor of your current employer. You’ll also be free to start your own business, even if you’ll compete with your current employer.
This also means, when accepting a new job, your new contract will not have any language about noncompetes.
FTC Expects More Freedom for Workers
“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” Khan said in a statement for the FTC when proposing the rule in January.
“Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.
“By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
Of course, businesses still have some ways to protect their trade secrets. Nondisclosure agreements (NDAs) and trade secret laws ensure you can’t use your current employer’s proprietary information to benefit a new employer or your small business.
Note: The FTC’s ban on noncompete clauses does not apply to senior executives who currently have noncompetes. Senior executives are defined as “workers earning more than $151,164 annually and who are in policy-making positions.”
When Does the Noncompete Clause Ban Go Into Effect?
The FTC announced the noncompete clause ban on April 23, 2024. It said the regulations would go into effect in 120 days. However, legal challenges could delay that.
The ruling passed 3-2 along party lines: Democratic commissioners voted in favor of the ban, while Republican commissioners voted against.
Immediately after the vote, the U.S. Chamber of Commerce announced it would sue the FTC over what it calls an “unlawful power grab” to overturn noncompetes.
The Chamber’s press release ends with the following promise: “The Chamber will sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked.”
