The Federal Trade Commission finalizes a new rule to prohibit employers from enforcing noncompetes; the rule is expected to increase the number of startups

The Federal Trade Commission has issued a final rule to promote competition by banning noncompetes against workers nationwide. According to the FTC press release, this final rule protects the fundamental freedom of workers to change jobs, increases innovation, and fosters new business formation.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.

In Part IV.B.3.b.i, “non-competes inhibit new business formation,” the final rule details the studies it reviewed and weighted in credibility to reach its conclusion about the number of additional new businesses that would be created. It includes a discussion of each study along with justification for weighing their conclusions heavily or not. The studies given high weight included “The Impact of Restricting Labor Mobility on Corporate Investment and Entrepreneurship,” which found a 7% impact from noncompetes. Another study, Employee Non-Compete Agreements, Gender, and Entrepreneurship,” found that an average increase in non-compete enforceability decreases the entry rate by 3.2%.

There does not appear to be an explanation of the math resulting in the commission’s estimate of 8,500 additional new businesses created each year from non-competes in the final rule, but it does state on pages 172-173, “The Commission’s finding that non-competes inhibit new business formation is principally based on the empirical evidence described in this Part IV.B.3.b.i.”

The rule also prohibits employers from enforcing existing noncompetes with workers other than senior executives. The FTC press release states that “existing noncompetes for senior executives can remain in force. Employers, however, are prohibited from entering into or enforcing new noncompetes with senior executives. The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions.”