Noncompete Ban: Economic & Other Implications

Now that we’ve covered the fundamental details of the FTC’s ban on noncompete agreements and alternatives to noncompetes in parts one and two, let’s turn our attention to the economic impact of this ruling: what will it mean for the United States economy?

Let’s examine the possible implications of this landmark regulatory change.

FTC Noncompete Ban: Recap

Haven’t caught up with parts one and two of this series yet? We encourage you to do so first—they lay a solid foundation for understanding the following discussion.

Here’s a quick recap of the primary details of the FTC’s rule banning noncompetes.

On April 23, 2024, the FTC published a press release regarding its decision to ban noncompete agreements for most employees nationwide. For reference, about 18% of the population (approximately 30 million people) are currently under noncompetes.

The FTC’s decision stems from its opinion that noncompetes hinder employee development, the economy, and the development of new businesses and innovations.

FTC Chair Lina M. Khan explained that some of the overarching goals of this decision are to make sure Americans can freely:

Pursue new jobs
Start new businesses
Bring innovative ideas to market

In doing so, Khan explains this decision will potentially come with several economic benefits.

Among them is the FTC’s estimate that the ban will grow small business development by 2.7% per year, creating over 8,500 new businesses.

But how accurate might these predictions be? And what are the other potential economic outcomes of this decision?

FTC’s Noncompete Ban: Economic Implications

The FTC’s ruling to ban noncompete agreements is poised to have major implications—economic and otherwise—when it takes effect (on September 4, 2024). Some effects are anticipated, and some, only time will tell.

Job Mobility

Removing barriers to job mobility is expected to empower workers to seek better opportunities.

The FTC believes noncompetes force unhappy employees to get lower-paying jobs in different industries. If they aren’t satisfied in their current position but a noncompete binds them, this clause prevents them from working for a competitor for a reasonable period of time.

The FTC says banning noncompetes will inspire workers to negotiate for higher wages and seek more job satisfaction. Both employees and employers will know the employee has more leverage to do so.

Wage Growth

The noncompete ban’s effect, as estimated by the FTC, will positively influence wages. In turn, this will have a direct economic impact. The FTC predicts the ban will increase worker wages by between $400 and $488 billion over the next decade. This means the average worker could earn another $524 per year under the ban.

Employees no longer bound by noncompetes could have more bargaining power in terms of salary and wages. Reducing barriers to entrepreneurship, greater job mobility, less monopsony of business power, and more wage transparency and benchmarking could also equal economic growth.

Increased Focus on Employee Retention

More competition for workers might push companies to improve working conditions and benefits.

Noncompetes are already standard practice for many businesses, guarding against their employees obtaining a better offer. Employees retention strategies could shift with businesses forced to move away from relying heavily on noncompete agreements.

They will have to focus more on talent retention by making jobs more satisfying, improving wages, and other motivating factors.

Sectoral Effects

The ban will likely have a greater impact on certain industries than others.

One primary example is healthcare.

Healthcare

Along with increasing earnings for healthcare workers, the FTC anticipates the noncompete ban will cut healthcare costs by between $74 billion and $194 billion over the next decade.

Like many others, healthcare organizations use noncompete agreements to prevent their employees from moving between organizations, risking legal and financial consequences if they do. When healthcare workers, including medical specialists, can freely move between organizations, this could drive down the cost of medical services and treatments.

With increased job mobility, health professionals may bring updated or innovative practices or services to new organizations. Economically, this mobility could result in more efficient healthcare delivery methods and lower administrative costs. Ideally, this will also lead to better patient outcomes.

Another potential implication of the noncompete ban on healthcare is it increasing access to care. The ban could likely increase access to specialized care and alternative (non-mainstream) healthcare services. This greater availability might alleviate some of the strain on old-fashioned healthcare systems, saving everyone money.

Technology

Like healthcare, technology is also subject to serious implications from the noncompete ban.

The FTC’s Fact Sheet on the proposed final noncompete rule estimates the ban’s final rule will result in an average annual increase of 17,000 to 29,000 more patents for the next ten years. Assuming many of these patents are technological in nature, the tech industry as a whole could grow.

Notably, however, a particular exception to the noncompete ban relates to senior executives.

As per the FTC’s rule, existing noncompetes with senior executives (those who earn $151,164 or more and are in policy-making positions) can remain in effect.

Many senior tech executives could remain under their existing noncompetes because they make more than this. However, many tech industry employees make brilliant contributions but do not reach this threshold and would, therefore, be free to bring these innovations elsewhere.

Further, the ban does extend to senior executives who achieve this status after the ban takes effect. Following September 4, most employers cannot create new noncompete agreements for senior executives.

Noncompete Ban: Potentially Negative Economic Impact

Greater workforce dynamism resulting from the FTC’s noncompete ban could lead to sustainable economic expansion. However, opponents of the rule believe the risks outweigh the rewards.

A joint letter signed by the American Bankers Association, the Futures Industry Association, the Securities Industry & Financial Markets Association, and several other trade associations and companies within and outside of the financial industry opposed this proposed rule.

Rather than providing economic benefits, these opponents argue there would be much more serious costs of a noncompete ban.

As the letter outlines, their concerns include:

Protecting Business and Employee Interests: Noncompete agreements help protect investments in workforce development, intellectual property, and confidential information. They encourage higher wages, reduce turnover costs, and promote innovation.
Noncompetes are More Efficient than Alternatives: Opponents say noncompetes are more efficient than alternatives like trade-secret laws or nondisclosure agreements in safeguarding proprietary knowledge.
Compensation and Business Operations: The letter also touches on employee upskilling. Employers often invest in skill development for their employees. These investments often come with the employee first needing to agree to stay with the company for a certain length of time. According to the letter’s authors, this loss would not be in the best interest of employees or employers.
Legal Concerns: The letter explains that the FTC does not have any legal authority under the FTC Act to create such rules. It adds that it has no jurisdiction over noncompetes (historically upheld as a matter of state law). This exceeds the agency’s mandate under Sections 5 and 6(g) of the FTC Act. Consequently, the ban is in danger of being overly broad and constitutionally questionable.
State Authority: States have long been responsible for regulating noncompete agreements. 47 states currently enforce reasonable noncompete clauses. A ban would disrupt this tradition (unless Congress explicitly authorizes it).

Noncompete Ban’s Effect on the Economy

Economic implications, whether positive or negative, remain to be seen. While the FTC’s predictions are understandably optimistic, opponents aren’t as enthusiastic.

Given the recent regulatory overhaul, compliance and understanding alternatives to noncompete clauses is more important than ever.

Book a call with the business lawyers at Contiguglia Law today to discuss the noncompete ban and how we can help you protect your business in its wake.

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