The Federal Trade Commission (FTC) voted 3-2 on Tuesday to ban noncompete agreements, which companies use to prevent employees from working with competitors within the same industry.

According to CNBC, the new regulation is expected to take effect 120 days after its official publication in the Federal Register, although business groups will likely challenge it.

FTC Votes to Ban Noncompete Agreements

Under the proposed rule, companies would be required to eliminate existing noncompete agreements for all employees except high-ranking executives earning over $151,164 annually and holding policy-making positions.

According to the FTC, implementing the ban on noncompetes is projected to stimulate business formation, resulting in an estimated 2.7% annual increase and over 8,500 new businesses yearly.

The rule is also anticipated to increase workers' earnings by approximately $524 annually on average and reduce healthcare costs by up to $194 billion over the next decade. 

Moreover, the FTC believes that the ban will foster innovation, potentially increasing patents by 17,000 to 29,000 annually over the next decade.

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Final Rule of FTC

Noncompete agreements have long been criticized for their restrictive nature, often limiting workers' ability to pursue new job opportunities or start their own businesses. 

"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 press release.

"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," she added. 

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