On April 23, the Federal Trade Commission (FTC) announced the adoption of a new rule that bans most noncompete agreements in the United States. The rule was adopted on a 3-2 vote and comes after an extended rulemaking process and over 26,000 comments. The rule is expected to go into effect in early September.

The FTC estimates that 30 million workers are subject to noncompete agreements. Supporting its decision, the Commission found that noncompete agreements restrict competition and artificially keep wages low, reduce innovation, prevent thousands of new businesses from forming each year, and force workers to either stay in a job they no longer want, move, or start over in a new industry. The FTC found that noncompete agreements were increasingly being used to restrict lower-level employees, not just higher-level executives.

The FTC noncompete rule makes the finding that noncompete agreements are an unfair method of competition. The rule prohibits employers from entering into new noncompete agreements with workers or enforcing existing ones. Noncompete agreements can still be enforced and entered into with “senior executives,” defined as employees earning more than $151,164 per year and are in a “policy-making position” within their organization. Employers are required to notify their workers with noncompete agreements that they are no longer enforceable. The rule does still allow noncompete agreements between buyers and sellers of a business.

As a refresher, noncompete agreements sometimes appear as part of an employee’s contract when they are first hired. Though they take several forms, they generally include a promise by the employee to not work in the employer’s industry in a certain geographic area for a specified period of time if they leave the employer. Employers that use noncompete agreements argue that they are necessary to protect investments and trade secrets. The FTC argues that investments and trade secrets can be protected through means other than restricting employees’ work choices, like nondisclosure agreements and existing trade secrets laws.

Following the FTC’s announcement, the US Chamber of Commerce filed suit in federal court in Texas to block the rule, arguing a ban on noncompete agreements is beyond the FTC’s authority. It is unclear so far if the suit will delay the implementation of the rule.

Washington passed its own laws limiting noncompete agreements in 2019. Under state law, noncompete agreements were only enforceable against an employee if (1) the employer disclosed the agreement to a prospective employee in writing by the time of their acceptance of the job, or (2) the agreement was entered into after the start of employment, but with additional and independent compensation. Employees must make annual pay of more than $120,560 in 2024 for the noncompete agreement to be enforceable.

The FTC rule banning most noncompete agreements will preempt state law if it goes into effect. While it’s unclear how many local governments in Washington use noncompete agreements for their own employees, some local government contractors may use noncompete agreements that may be impacted by the new FTC ban.