The US Federal Trade Commission (FTC) has deemed non-compete clauses to be unfair competition (in violation of Section 5 of the FTC Act) and issued a nationwide ban. Once the ban goes into effect – 120 days after its publication in the Federal Register – existing non-competes will no longer be enforceable for most workers, and companies will have to inform them of the change.
Non-competes will remain enforceable for senior executives – defined as workers who earn more than $151,164 a year and help set company policy – but even for them, no new clauses may be entered into.
Non-competes are labor-contract terms that for some period of time forbid an employee who leaves a company to sell his services to a competitor. According to the FTC, such clauses can oblige workers to stay in a disliked job, change fields (often with a cut in pay), move, leave the workforce or defend themselves against lawsuits. “An estimated 30 million workers – nearly one in five Americans – are subject to a noncompete,” it says.
According to FTC Chairman Lina M. Khan, non-competes “keep wages low, suppress new ideas, and rob the American economy of dynamism.” Indeed, she predicts that the ban will raise the number of start-ups founded per year by more than 8,500, or 2.7 percent, while the FTC believes that it will raise the average worker’s earnings by an annual $524. The FTC believes, in addition, that over the next decade, the ban will lower the total cost of healthcare by up to $194 billion and raise the number of patents by an annual 17,000 to 29,000.
Instead of non-competes, says the FTC, companies should make use of trade-secret law and non-disclosure agreements (NDAs), which suffice to “protect proprietary and other sensitive information.” It cites researcher estimates that more than 95 percent of workers bound by non-competes are also bound by NDAs.
The vote, incidentally, was close – three commissioners for, two against.
