FTC bans noncompete clauses that prevent U.S workers from changing jobs – Business
The U.S Federal Trade Commission has announced that it’s banning companies from enforcing noncompete clauses in their employees’ contracts, meaning that anyone previously bound by one will be free to join competing firms.
In a ruling announced today, the FTC said the ban covers the vast majority of existing noncompete clauses.
“In the final rule, the Commission has determined that it is an unfair method of competition and therefore a violation of Section 5 of the FTC Act, for employers to enter into noncompetes with workers and to enforce certain noncompetes,” the FTC said in a statement.
Noncompete clauses are typically used by companies in the U.S. to prevent their employees from leaving their role to take up a position with a competitor. They also prevent workers from starting competing businesses, but they have become a highly contentious issue in many industries, especially in the technology sector.
The FTC said noncompetes have the effect of stifling innovation and harming workers by restricting their freedom, while supporters argue that they are necessary to protect companies’ intellectual property and trade secrets.
“Non-compete 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 non-competes are banned,” FTC Chair Lina Khan said in a statement today.
The move to ban noncompetes was first proposed by the FTC in January 2023 and more than 26,000 public comments were obtained, with the vast majority being in favor of the ban.
The final rule announced today will take effect 120 days after it is published in the Federal Register, unless opponents of the rule secure a court order blocking it. However, the ruling is facing a legal challenge by the U.S. Chamber of Commerce, which advocates for free enterprise and says noncompetes are necessary to protect companies, the Wall Street Journal reported.
“This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers and our economy,” said the Chamber’s president and chief executive Suzanne Clark in a statement.
The ruling is retroactive, meaning that it nullifies all existing noncompetes, with the exception of those applied to company executives that comprise less than 1% of the workforce, the FTC said. Executives are defined as those earning more than $151,164 a year and serve in policy-making positions.
In the case of executives, any existing clauses can still be enforced. The FTC justified this, saying that this subset of workers is much less likely to be subject to the “acute, ongoing harms currently being suffered by workers subject to existing noncompetes”. It added that public comments have also raised “credible concerns about the practical impacts of extinguishing existing noncompetes for senior executives.”
That said, the exception only applies to existing noncompetes, and companies will be banned from creating similar contractual clauses for future executive hires.
According to the FTC, the use of noncompetes has become widespread in the U.S. economy, with an estimated 20% of American employees, or 30 million workers, subject to them.
The Commission forecasts that the ban on noncompetes will help to boost wages. By enabling employees to seek new jobs in industries where they have appropriate skills, it believes they’ll be able to earn an average of $524 more per year.
Some U.S. states have already enforced limits on noncompete agreements. For instance in Washington, they can only be applied to employees earning more than $100,000 a year, or to independent contractors who make at least $250,000 annually. In addition, the noncompete clauses can only be enforced for 18 months.
Microsoft Corp. said in June 2022 that it will stop including noncompete clauses in its U.S. employment agreements and also remove them from any existing contracts. The policy was applied to everyone except those in executive positions at the company.
“Microsoft believes that American innovation thrives when people have the freedom to pursue the career path they feel best aligns with their passion and skills,” Microsoft President Brad Smith said in a statement today.