FTC Passes Ban On Non-Compete Clauses In Employee Contracts

A sweeping new Federal Trade Commission rule will prohibit companies nation from including non-compete agreements in contracts with employees.

The new rule also will make existing non-compete clauses unenforceable for all but senior executives, and companies also would be prohibiting from entering into new clauses even with those at the upper end of the workforce.

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The new rule is expected to have a significant impact on the entertainment and media sector, where non-compete clauses are widespread, albeit they already have been unenforceable in California.

“Workers ought to have the right to choose who they want to work for,” President Joe Biden said in a statement after the FTC vote today passing the ban. Commissioners voted along party lines for the new rule.

“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,” FTC chairwoman Lina Khan said in a statement.

The rule will take effect in 120 days, or four months. Khan and other FTC officials argue that the non-compete ban will spur competition and drive up wages, and lead to more business creation. They also said that many businesses already protect their proprietary information with non-disclosure agreements and trade secret laws.

The U.S. Chamber of Commerce plans to challenge the new rule in court. CEO Suzanne P. Clark said in a statement, “Noncompete 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.”

The existing non competes that will still be valid apply to senior executives earning more than $151,164 annually and who are in policy-making positions, the FTC said.

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