The US Federal Trade Commission (FTC) has announced a rule that prohibits employers from including non-compete clauses in employment contracts. Non-compete clauses typically impede an employee’s ability to work within a certain business sector or for specific employers after their present contract terminates.
This rule was initially proposed in January 2023, stating 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, however, does permit existing non-competes to “remain in force” for senior executives whilst invalidating others from the effective date of this new rule. The executives, under this rule, are defined as employees earning over $151,164 annually who are instrumental in determining company policies.
The Federal Trade Commission Act, enacted in 1914, along with the Clayton Anti-Trust Act, was designed to safeguard consumers and oversee competition amongst businesses. This legislation was aimed at outlawing “unfair and deceptive acts and practices” between companies and tasked government agencies with interpreting and enforcing the bill and its amendments. The new rule draws specifically on Section 5, relating to “unfair methods of competition.”
Lina Khan, FTC Chair, elucidated the ethos of the new rule stating, “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 mandate also necessitates that employers inform former employees about their decision to no longer enforce non-compete clauses. It still allows non-disclosure agreements and trade secret laws to persist as a means of shielding a company’s proprietary knowledge that an employee may have garnered during their tenure. Critics have argued that non-compete clauses effectively hinder economic mobility and weaken workers’ negotiating power, especially as the US gig economy expands.