The Federal Trade Commission recently banned companies from enforcing noncompete agreements.
The rule doesn’t include banks but covers bank holding companies, affiliates and subsidiaries. The FDIC could apply the rule to banks, according to the Independent Community Bankers of America.
The FTC’s final rule defined noncompates as “an unfair method of competition.” Existing noncompetes are allowed for senior executives — someone making more than $151,164 in a policymaking position. Existing agreements with other workers are not enforceable after the effective date, which is 120 days after Federal Reserve publication.
In an April 2023 letter, the ICBA, American Bankers Association and other trade groups opposed the rule, claiming noncompetes encourage investment in employees and protect intellectual property; allow firms to reduce training and recruitment expenses; offer higher wages to new employees; and promote innovation. The FTC lacks the authority to issue the rule as the FTC Act doesn’t authorize the agency to have “generally applicable substantive rules defining unfair methods of competition,” according to the groups.
Noncompetes are more effective than nondisclosure agreements because employers can avoid misappropriation of trade secrets to land an injunction, the groups stated. Noncompetes are also often included in contractual agreements with additional compensation through retention bonuses, added pay, stock awards, deferred compensation or as part of a severance package.
“Finally, the proposed rule also violates bedrock principles of federalism,” the groups wrote. “For centuries, noncompetes have been a matter of state law, and today, 47 states enforce reasonable noncompete clauses.”
According to the FTC, banning noncompete agreements will lead to a nearly 3 percent rise in new firm formations. The agency predicts workers will make $400 to $488 billion in increased wages in the next decade.