The US Federal Trade Commission has voted to adopt a ban on non-compete clauses that prevent workers from switching jobs within the same industry.
The FTC claims the new rule will “protect the fundamental freedom of workers to change jobs”, claiming this will increase innovation and foster the growth of new businesses.
“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 noncompetes are banned,” said chair of the FTC 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.”
Non-compete clauses
Restrictive covenants: low income workers and the new exclusivity ban
According to US labour market watchers, non-compete clauses in recent years have become more widespread, having historically been focused on preventing high-earning professionals from jumping to a competitor and sharing insider information.
In the UK, around a quarter of the workforce is subject to non-compete clauses, according to the Competition and Markets Authority. In the US, around 38% have signed such a clause during their career, according to the US Treasury Department.
The FTC first proposed a ban on non-competes in January 2023, and it has gained the backing of unions including the Service Employees International Union and AFL-CIO, a union body similar to the TUC.
According to the FTC, 25,000 public comments out of a total of 26,000 were in favour of a ban.
Many business leaders strenuously oppose the ban, however, and the US Chamber of Commerce immediately vowed to challenge the new rule. President and CEO Suzanne P Clark said yesterday the federal ban on non-compete clauses is not only unlawful but also a “blatant power grab” that will undermine American businesses’ ability to remain competitive.
“Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules,” she said. “Non-compete agreements are either upheld or dismissed under well-established state laws governing their use. Yet, today, three unelected commissioners have unilaterally decided they have the authority to declare what’s a legitimate business decision and what’s not by moving to ban noncompete agreements in all sectors of the economy.
“This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy. The Chamber will sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked.”
Existing non-competes for high earners with salaries over $151,164, who work in a policy-making position, will remain in place, the FTC said.
Opposition to non-compete clauses has grown in the US as they began to be used in more unusual ways.
In 2016, for example, fast-food chain Jimmy John’s was investigated by the New York attorney general’s office for asking sandwich makers to sign agreements preventing them from working at similar businesses nearby.
In May 2023, the UK government announced that it would limit the enforceability of non-compete clauses to three months after the last day of employment – a rule that is yet to be enacted. In December 2022, legislation came into force that prevents employers from enforcing non-compete clauses against low-income workers.
The current enforceability period for UK non-compete clauses is six months. UK employers can also draw on confidentiality clauses and ask exiting employees to take garden leave if they are concerned about them sharing sensitive information or contacts.
Daniel Stander, and employment lawyer at Vedder Price, said the US seems to be influencing a global trend away from the use of non-compete clauses.
“The UK Government’s intention to limit non-competes to three months stops short of a total ban, but both jurisdictions share the view that freedom to change jobs is core to a competitive, thriving economy and that non-competes suppress wages and hamper innovation,” he said.
“There are clear signals of a move in the same direction across the pond. Other jurisdictions, including the EU and Australia have also indicated they will consider moving on this issue too.”
“In the UK, there are big questions left unanswered and in particular around what will happen to existing non-competes that are longer than three months, or to non-competes that come into force between now and when any legislation is enacted.
“Will they automatically be treated as unenforceable, or amended to apply for three months only, or will there be a grandfathering provision such that existing provisions continue to apply for a specified period?”
Stander added that businesses should begin to review employment contracts in advance of the UK legislation coming into force.
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“In the meantime, employers can start to prepare by having employment contracts reviewed to ensure that other restrictive covenants (such as non-solicitation/non-dealing, confidentiality obligations) are well-drafted and provide the best possible protection, as well as considering other alternatives like longer notice periods, more active use of garden leave, and tighter enforcement around confidentiality undertakings,” he advised.
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