The Federal Trade Commission (FTC) banned noncompete agreements after a vote on Tuesday, making all new and existing contracts with a few exceptions null and void. FTC stated this will allow 30 million Americans to change jobs or start their own business.
The rule will be enforced 120 days after the announcement by FTC. Employers must update the employees on the new rule changes, including that the existing noncompete agreements will no longer be enforced if they change jobs.
Companies make their employees sign agreements that stop them from working a new job in the same industry for months, even after leaving, or prevent them from taking a job nearby (up to 50 miles in distance). Several states have already outlawed such agreements in recent years. The current ruling has some exceptions for top executives, who usually have information about a company's special projects or may be otherwise damaging. These include top executives with a yearly income of $151,000.
The impact is much more significant than what one expects. FTC calculated that an average worker might earn $524 more annually, resulting in a $488 billion increase in workers' wages over ten years. The rule change will also pave the way for thousands of new businesses in different parts of the country.
"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. "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 current noncompete agreements impact almost one in five workers. They are forced to stay, leave for a job in a different industry, or work far from home. Some yet have to take lesser-paying jobs. The exception for executives will impact less than one percent of the total workforce, a number that makes sense to many people. FTC has found that noncompete agreements have detrimentally affected the overall job market.
Non-disclosure agreements (NDAs) are pretty standard in the industry, and most people sign them when they come in knowledge of proprietary information, to protect their employers. Most people who signed a noncompete have already signed an NDA. Businesses can also retain employees and stop them from leaving by offering better wages instead of using such agreements to threaten someone's livelihood.
The impact of the FTC move will be tremendous and allow breathing space for many professionals forced to stay in their current roles. While many businesses used their agreements to protect themselves, others have taken undue advantage of them and forced employees to stay. One hopes that days of such exploitation are over.
