FTC puts a ban on noncompete clauses preventing U.S. workers’ job changes

The United States Federal Trade Commission has declared that it will prohibit companies from enforcing noncompete clauses in employee contracts, allowing anyone previously bound by one to join other firms.

In a finding issued today, the FTC stated that the ban applies to the vast majority of existing noncompete provisions.

“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 Federal Trade Commission (FTC) said in a statement.

Noncompete agreements are commonly employed by corporations in the United States to prevent its employees from leaving their employment to join a competitor. They also prohibit employees from forming competitive enterprises, although they have become a hotly debated subject in many industries, particularly the technology sector.

The FTC claims that noncompetes stifle innovation and damage workers by limiting their freedom, whilst supporters maintain that they are important to preserve corporations’ 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,” Lina Khan, the chairman of the Federal Trade Commission, said in a

The FTC originally suggested a ban on noncompetes in January 2023, and more than 26,000 public comments were received, with a clear majority in favor of it.

The final rule issued today will take effect 120 days after it is published in the Federal Register unless opponents obtain a court order to halt it. The U.S. Chamber of Commerce, which promotes free enterprise and believes noncompetes are important to protect businesses, is challenging the verdict in court, according to the Wall Street Journal.

“This decision sets a dangerous precedent for government micromanagement of business, which can harm employers, workers, and our economy,” said Chamber President and CEO Suzanne Clark in a statement.

The order is retroactive, which means it nullifies all current noncompete agreements, with the exception of those applied to firm executives who make up less than 1% of the workforce, according to the FTC. Executives are classified as individuals who make more than $151,164 per year and work in policymaking roles.

Existing clauses in executive contracts can still be enforced. The FTC justified this by stating that this subset of workers is significantly less likely to be subject to the “acute, ongoing harms currently being suffered by workers subject to existing noncompetes”. It also stated that public submissions have raised “credible concerns about the practical impacts of extinguishing existing noncompetes for senior executives.”

However, the exclusion only applies to current noncompete agreements, and corporations will be prohibited from drafting such contractual restrictions for future executive hiring.

According to the FTC, noncompete agreements have become common in the US economy, with an estimated 20% of American employees, or 30 million people, subject to them.

The Commission expects that the restriction on noncompetes will assist to raise salaries. It believes that allowing individuals to pursue new jobs in fields where they have adequate abilities will result in an average annual salary increase of $524.

Some US jurisdictions have previously imposed restrictions on noncompete agreements. For example, in Washington, they can only be applied to workers making more than $100,000 per year or independent contractors earning at least $250,000 per year. Furthermore, the noncompete restrictions can only be enforced for 18 months.

In June 2022, Microsoft Corp. announced that it will no longer use noncompete terms in its US employment agreements and will delete them from any existing contracts. The policy was extended to all employees excluding those in high positions at the organization.

“Microsoft believes that American innovation thrives when people are free to pursue the career path that best aligns with their passions and skills,” Microsoft President Brad Smith said in a statement today.

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