The U.S Federal Trade Commission today announced that it’s banning companies from enforcing noncompete clauses in their employees’ contracts, meaning that anyone previously bound by one will be free to join competing firms.

In a ruling, the FTC said the ban covers the vast majority of existing noncompete clauses. “In the final rule, the Commission has determined that it is an unfair method of competition and therefore a violation of Section 5 of the FTC Act, for employers to enter into noncompetes with workers and to enforce certain noncompetes,” the commissio said in a statement.

Noncompete clauses are typically used by companies in the U.S. to prevent their employees from leaving their role to take up a position with a competitor. They also prevent workers from starting competing businesses, but they have become a highly contentious issue in many industries, especially in the technology sector.

The FTC said noncompetes have the effect of stifling innovation and harming workers by restricting their freedom, while supporters argue that they are necessary to protect companies’ intellectual property and trade secrets.

“Non-compete 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 non-competes are banned,” FTC Chair Lina Khan said in a statement today.

The move to ban noncompetes was first proposed by the FTC in January 2023 and more than 26,000 public comments were obtained, with the vast majority being in favor of the ban.

The final rule announced today will take effect 120 days after it’s published in the Federal Register, unless opponents of the rule secure a court order blocking it. However, the ruling is facing a legal challenge by the U.S. Chamber of Commerce, which advocates for free enterprise and says noncompetes are necessary to protect companies, the Wall Street Journal reported.

“This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers and our economy,” chamber President and Chief Executive Suzanne Clark said in a statement.

The ruling is retroactive, meaning that it nullifies all existing noncompetes, with the exception of those applied to company executives that comprise less than 1% of the workforce, the FTC said. Executives are defined as those earning more than $151,164 a year and serve in policy-making positions.

In the case of executives, any existing clauses can still be enforced. The FTC justified this, saying that this subset of workers is much less likely to be subject to the “acute, ongoing harms currently being suffered by workers subject to existing noncompetes.” It added that public comments have also raised “credible concerns about the practical impacts of extinguishing existing noncompetes for senior executives.”

That said, the exception only applies to existing noncompetes, and companies will be banned from creating similar contractual clauses for future executive hires.

According to the FTC, the use of noncompetes has become widespread in the U.S. economy, with an estimated 20% of American employees, or 30 million workers, subject to them.

The commission forecasts that the ban on noncompetes will help to boost wages. By enabling employees to seek new jobs in industries where they have appropriate skills, it believes they’ll be able to earn an average of $524 more per year.

Some U.S. states have already enforced limits on noncompete agreements. For instance in Washington, they can be applied only to employees earning more than $100,000 a year, or to independent contractors who make at least $250,000 annually. In addition, the noncompete clauses can be enforced only for 18 months.

Charles King of Pund-IT Inc. said he welcomed the ban on noncompetes for a number of good reasons. Firstly, he said, it eliminates the patchwork of noncompete rules and enforcement processes that varied widely across the U.S. from state to state and often changed significantly over time. And the decision also recognizes a fundamental reality of modern work. “Jobs seldom last forever and most employees, from those on the factory floor, to workers in the executive suite, expect to hold numerous positions and titles over the course of their lives,” King said.

In addition, King said noncompetes were unbalanced, providing significant benefits to employers, but few, if any, benefits to employees. “Add in the fact that there are effective legal remedies for pursuing and punishing theft of company intellectual and physical property,” the analyst said. “Overall, the FTC’s consignment of noncompete clauses to the dustbin is well deserved and long overdue.”

Another analyst in favor of banning noncompetes is Rob Enderle of Enderle Group, who told SiliconANGLE that California has already set a good example for others to follow with its refusal to enforce the clauses. He said the costs involved in creating and enforcing noncompetes can instead be spent on employee compensation and benefits, providing a far greater incentive for employees to stay where they are.

“I think it’s far better to simply pay and treat employees well so they don’t want to leave, rather than locking them in so they can’t leave,” the analyst said. “Generally, this approach is better for productivity and morale, compared to giving employees no choice but to work for you. I strongly believe noncompetes are bad for the country, for companies and especially bad for employees, and I consider the practice to be a sign of an abusive employer.”

The abolition of noncompete agreements has found supporters elsewhere in the tech industry. Microsoft Corp. notably said in June 2022 that it will stop including noncompete clauses in its U.S. employment agreements and also remove them from any existing contracts. The policy was applied to everyone except those in executive positions at the company.

“Microsoft believes that American innovation thrives when people have the freedom to pursue the career path they feel best aligns with their passion and skills,” Microsoft President Brad Smith said in a statement today.

Image: Microsoft Designer