The Federal Trade Commission has announced a rule banning noncompetes in the United States. According to the FTC, the ban seeks to “promote competition” by “protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.” The rule is expected to go into effect in six months.
The rule will not apply to existing noncompetes for senior executives (workers earning more than $151,164 annually and who are in policy-making positions), although employers cannot enter into or enforce new noncompetes for senior executives. In all cases, employers must provide notice to workers bound to an existing noncompete that the agreement will not be enforced against them in the future.
Noncompetes can be used in the U.S. to impose contractual conditions on employees that prevent workers from taking a new job or starting their own business, the FTC notes. The practice, to which an estimated one in five American workers are subject, can subsequently force workers to either stay in a job they want to leave or incur costs such as switching to a lower-paying field or geographically relocating, the commission adds.
The FTC projects that the move to ban noncompetes will increase earnings for the average worker by $524 per year, lower healthcare costs by up to $194 billion over the next decade, and lead to an estimated average increase of 17,000 to 29,000 more patents each year for the next decade.
“Noncompete 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 noncompetes are banned,” said FTC Chair Lina M. Khan about the move. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”
As an alternative to noncompetes, the commission identifies trade secret laws and non-disclosure agreements as avenues to provide employers with the means to protect proprietary and sensitive information. As reported by Bloomberg, however, some business groups have opposed the ban on the grounds that it is overly broad and limits the ability of companies to protect such information.
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