More U.S. workers will soon be free to leave their employers to work for competitors, thanks to a new federal rule that will end the long-standing practice of binding workers through noncompete agreements.
The U.S. Federal Trade Commission on Tuesday issued a final rule banning most non-compete agreements nationwide. The agency estimated that by granting more freedom, the change would lead to the creation of 8,500 new companies per year, an average annual salary increase of $524 for workers, lower health care costs and up to 29,000 more patents per year for the next year Decade.
According to the FTC, about one in five U.S. workers is bound by contractual clauses that prevent them from taking new jobs with a competitor or starting their own competing business for a period of time. The agreements can trap workers and slow career advancement and wage increases, two things that workers often achieve when they change jobs.
The agreements also disproportionately affect workers in tech and certain other professions: 36 percent of engineers and architects work under noncompete agreements, as do 35 percent of workers in computer and math fields, according to a study from the Universities of Maryland and Michigan .
Under the FTC’s new rule, “tech workers will likely see an increase in the outside opportunities available to them,” says Evan Starr, an associate professor of business administration at the University of Maryland who worked on the study. “They will have more freedom to work where they want; They are more likely to be paid higher wages.”
Opponents of non-compete agreements say they harm workers by keeping them in low-paying jobs and also hinder innovation by preventing people from starting their own businesses or putting innovative ideas into practice. Proponents of non-compete agreements argue that the agreements promote investment in human resources and protect trade secrets. However, recent research from Starr suggests that banning non-competes has not led to an increase in trade secret litigation.
The new FTC rule provides an exemption to maintain existing non-compete agreements for senior executives. But it prevents companies from creating new non-compete agreements for these high-level workers. The rule is expected to come into effect in about four months, but challenges are expected. Two commissioners who voted against the rule saw it as an overreach of power by the FTC. The U.S. Chamber of Commerce quickly announced after the rule was passed that it would file a lawsuit to try to block it.
Several states, including technology hub California, have already banned the enforcement of non-compete agreements. But a recent turnaround has seen the issue gain traction in dozens of states. In the 2023 legislative session, 38 states introduced 81 bills aimed at banning or restricting the enforcement of non-compete agreements. California’s long-standing law is considered one of the reasons Silicon Valley became a hub for innovation while the once-similar technology corridor in Massachusetts did not flourish to the same extent.
Tech executive Daniel Powers has fought non-compete agreements twice in his career. In 2010, IBM tried to delay for a year its move from New York to Seattle to work for Amazon Web Services, the online retailer’s cloud division. The parties agreed that Powers would take six months off work. Luckily for Powers, Amazon agreed to pay him even if he couldn’t work.