FTC bans employers from using noncompete clauses
They 'keep wages low, suppress new ideas and rob the American economy of dynamism.'
The US Federal Trade Commission (FTC) has banned noncompete clauses in a move to "drive innovation" and protect workers' rights and wages, the regulator said in a press release. The new rule will free most new and current employees from such agreements, with the exception of "policy-making" executives earning more than $151,164 per year.
"Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism," said FTC Chair Lina M. Khan. The agency estimated that the new rule will allow the creation of 8,500 new businesses each year, increase worker earnings by $524 per year and lower health care costs by $194 billion over the next decade.
Noncompete clauses, widely used in the tech industry, keep employers from freely changing to similar jobs or starting a business in the same field. The result is that workers must often stay in jobs they don't want, switch to a lower-paid position, relocate, or defend against costly litigation. "An estimated 30 million workers — nearly one in five Americans [in the workforce] —are subject to a noncompete," according to the FTC.
The Commission found that noncompetes tend to negatively affect competitive conditions in labor markets by inhibiting efficient matching between workers and employers. There is also evidence that noncompetes lead to increased market concentration and higher prices for consumers.
Companies must now cancel existing noncompete clauses and notify employees about the change. The ruling applies to most employees and future hires, but current deals with senior executives still apply on the grounds that such agreements are likely to have been agreed upon by both parties.
Tech companies ostensibly use noncompetes as a way to protect IP, but they function in reality to lock in workers. The FTC said that trade secret laws and non-disclosure agreements (NDAs) are a better way to protect IP, and "employers that wish to retain employees can compete on the merits for the worker's labor services by improving wages and working conditions."
Microsoft, the third largest tech industry employer in the US, eliminated such clauses back in 2022. "While our existing employee agreements have noncompete obligations, we do not endorse the use of such provisions as a retention tool," the company said at the time.
The FTC vote went 3 to 2 along party lines. Republican commissioner Melissa Holyoke said the Commission "overstepped the boundaries of its power" and estimated the ruling would be challenged in court and struck down.
