US federal agency bans employers from using non-compete clauses News
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US federal agency bans employers from using non-compete clauses

The US Federal Trade Commission (FTC) announced a rule Tuesday banning employers from using non-compete clauses in worker’s employment contracts. Non-compete clauses are portions of language in employment contracts that restrict an employee from working in a certain sector of business or for certain employers after their contract with their current employer ends.

The rule, which was first proposed in January 2023, “provides that it is an unfair method of competition—and therefore a violation of [the Federal Trade Commission Act]—for persons to…enter into non-compete clauses…with workers on or after final rule’s effective date.” The rule allows existing non-competes to “remain in force” for senior executives while invalidating others as of the rule’s effective date. Senior executives are defined in the rule as employees making more than $151,164 a year who hold key “policy making positions” in a company.

The Federal Trade Commission Act was passed in 1914 along with the Clayton Anti-Trust Act to protect consumers and monitor competition between businesses. The legislation proscribed “unfair and deceptive acts and practices” among businesses and created government agencies to interpret and enforce the many provision within the bill and its amendments. The agency specifically cited Section 5, concerning “unfair methods of competition,” in justifying the new rule.

FTC Chair Lina Khan further explained:

Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from more than 8,500 new startups that would be created a year once noncompetes are banned…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.

The rule also requires employers to inform former employees that they will no longer enforce non-compete clauses. At the same time, it leaves intact non-disclosure agreements and trade secret laws as a means of protecting proprietary knowledge that an employee may have derived from their time at a company.

Non-compete clauses have been criticized as preventing economic mobility and diminishing the bargaining power of workers an issue that has become especially important as the US gig economy has grown.

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