FTC Bans Noncompete Clauses, Freeing Workers To Pursue New Jobs And Start Businesses

The Federal Trade Commission announced on Tuesday the passing of a new rule banning noncompete agreements for workers.

The 3-2 decision of FTC rule makers was made to help promote career mobility, innovation and spur on competition by prohibiting employers from using noncompete clauses that restrict workers from freely changing jobs.

The FTC’s vote determined that noncompete agreements are an unfair method of competition that dampens wages, hamstrings innovation and blocks potential entrepreneurs from building new businesses that would hire more people.

“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,” said FTC chair Lina Khan in a statement. “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.”

Employers will be required to provide written notice to employees that their existing noncompetes are no longer enforceable. The rule applies retroactively, so employers must rescind existing noncompete agreements. The new law, however, does have a ceiling: existing noncompetes for senior executives are still compulsory.

Over the years, workers have felt stuck in their jobs and were afraid to take another role elsewhere. The reluctance to remove themselves from an untenable situation was due, in part, to the dreaded non-compete clauses in their hiring agreements. Workers either remained trapped or faced the risk of legal action if they joined a rival business.

What Is A Noncompete Clause?

Traditionally, a noncompete clause is a legal agreement embedded in an employment contract that restricts a worker’s ability to compete against their former employer. The clause usually provides specific timeframes and geographic locations where the employee is not allowed to work for a competitor or start their own competing business. Employers claim that the clause is necessary to guard confidential information, customer lists and other proprietary information.

Potential Benefits Of The FTC’s New Ruling

The ban will enable employers to hire the best talent since they won’t be hindered from recruiting workers. Unless the rule is challenged or overturned, the decision will aid in increasing employee freedom to switch jobs without any repercussions. The removal of the noncompetes can enhance wages by around $300 billion per year for 30 million Americans, according to the FTC.

The new rule will potentially enable workers to change roles and offer new ideas to competing firms. This can lead to a boost in entrepreneurship for those seeking to start a new business.

Without the change, large employers may continue to flex their muscles and use their leverage and bargaining power to pressure low-wage workers into signing noncompete agreements.

Anti-Poaching Agreements

In the late 2000s, a number of high-profile Silicon Valley tech giants were accused of enforcing anti-competitive employee solicitation agreements, where they would refrain from recruiting and poaching employees from other companies within their tech ecosystem, thwarting the mobility of workers.

In response, the United States Department of Justice sued Apple, Google, Intel and Adobe over these anti-poaching agreements in 2009. The DOJ argued that the alleged collusion dampened salaries, keeping them artificially lower than they could have earned if there wasn’t a behind-the-scenes agreement. The lawsuit was ultimately settled in 2014 for over $400 million.

Blocking The FTC Ruling

Business organizations, including the U.S. Chamber of Commerce, are challenging the ruling in court, alleging the federal agency overstepped its authority.

“The Federal Trade Commission’s decision to ban employer noncompete agreements across the economy is not only unlawful, but also a blatant power grab that will undermine American businesses’ ability to remain competitive,” said U.S. Chamber of Commerce president and CEO Suzanne P. Clark following the FTC vote.

Some state attorneys general have also criticized the rule as an overreach, arguing that noncompete policies should be left to individual states.