The Federal Trade Commission (FTC) has issued a final rule banning non-compete clauses nationwide. In a 3-2 ruling, the FTC said the move would “promote competition” and protect ”the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.”
The final rule will go into effect in 120 days and eliminate non-competes for the majority of Americans. The FTC estimated that 30 million workers (or one-in-five Americans) are subjected to non-compete clauses.
FTC Chair Lina M. Khan said in the announcement: “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. 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 Brewbound previously reported, the move comes as non-competes in the craft brewing industry have come under scrutiny following a pair of lawsuits against Boston Beer, which has notably enforced them in its employee contracts. A lawsuit brought by Boston Beer against a former employee for allegedly violating a non-compete agreement was dismissed in February.
The FTC said it anticipates the ruling will lead to a +2.7% annual increase in the formation of new businesses, creating an additional 8,500 new businesses each year. Additionally the organization expects the move to lead to higher earnings for workers, increasing by an additional $524 annually, and lower health care costs by up to $194 billion over the next decade.
The government agency expects innovation to increase with an estimated average increase of 17,000 patents annually, to 29,000 patents each year over the next decade.
The FTC called non-competes “a widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business. Non-competes often force workers to either stay in a job they want to leave or bear other significant harms and costs, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave the workforce altogether, or being forced to defend against expensive litigation.”
However, noncompetes for senior executives can remain in force, although employers are banned from enforcing new noncompetes.
The FTC said employers will be required to notify employees other than senior executives that they are no longer bound by existing non-competes and the clauses will no longer be enforced.