Biden administration kills the non-compete agreement

The FTC voted Tuesday to ban contractual limits on where a departing employee can work next, a move it says will foster startups and innovation.
Existing non-competes will be vacated once the rule change takes effect. | Photo: Shutterstock

Say goodbye to the non-compete agreement.

The Federal Trade Commission killed the longstanding business convention Tuesday when it outlawed contractual agreements aimed at preventing an employee from jumping to a rival company or leaving to start a competing venture.

Starting in about four months, all U.S. companies will be prohibited from requiring non-compete commitments from new hires.

Existing non-compete agreements will no longer be enforced after that time, except for senior executives who are in policy-making positions and earn at least $151,164 annually. The FTC estimates that the carve-out will apply to less than 1% of the U.S. workforce.

Companies will be required to notify all other employees bound by a non-compete that the limitation on their next job has been lifted.

As a result, the FTC said, competition for talent will increase, eventually raising the pay of a typical worker by $524 per year.

The regulatory agency said the move will foster entrepreneurship and innovation by enabling individuals to start a business within their field of expertise without fear of being sued by a former employer. It projects that the ban will lead to the startup of at least 8,500 companies per year and the filings for an additional 17,000 to 20,000 patents in each of the next 10 years.

Yet the change should not encourage the theft of intellectual property because non-disclosure agreements (NDAs) and other trade-secret protections will remain in use. The FTC estimates that 95% of the individuals who are currently covered by a non-compete agreement are also party to an NDA.

Non-compete agreements are used primarily in the restaurant business at the corporate level, though some big-name chefs have reported being required to sign one. Lawsuits filed against ex-employees more often hinge on allegations the departing worker left with trade secrets or stolen ideas. 

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