The U.S. Federal Trade Commission (FTC) has banned non-compete agreements to “drive innovation” and protect workers’ rights and wages, the regulator said in a press release. The new rule will exempt most new and current employees from such agreements, except for “politically influential” executives who earn more than $151,164 per year.
“Non-competition policies keep wages low, stifle new ideas and rob the American economy of its dynamism,” said FTC Chairwoman Lina M. Khan. The agency estimates that the new rule will enable the creation of 8,500 new businesses per year, increase worker income by $524 per year and reduce health care costs by $194 billion over the next decade.
Non-compete clauses, common in the tech industry, prevent employers from voluntarily moving to similar jobs or starting a business in the same field. The result is that workers often have to keep a job they don’t want, move to a lower-paying job, relocate, or defend themselves against costly litigation. “An estimated 30 million workers – nearly one in five Americans [in the workforce] – are subject to a non-compete agreement,” the FTC said.
The Commission found that non-compete agreements tend to negatively affect competitive conditions in labor markets by hindering efficient coordination between employees and employers. There is also evidence that non-compete agreements lead to greater market concentration and higher prices for consumers.
Companies must now lift existing non-compete clauses and inform employees of the change. The ruling applies to most employees and future hires, but current senior management contracts will continue to apply as such arrangements are likely to have been agreed by both parties.
Tech companies use non-compete clauses ostensibly to protect intellectual property, but in reality they are used to retain employees. The FTC said trade secret laws and nondisclosure agreements (NDAs) are a better way to protect intellectual property, and “employers who want to retain employees can compete for the employee’s job performance by improving wages and working conditions.”
Microsoft, the third largest technology employer in the US, has already abolished such clauses in 2022. “Although our existing employee agreements contain non-compete covenants, we do not support the use of such provisions as a binding tool,” the company said at the time.
The FTC vote was 3-2 along party lines. Republic Commissioner Melissa Holyoke said the commission had “exceeded the limits of its power” and expected the ruling would be challenged in court and overturned.