FTC Announces Rule Banning Noncompetes and What It Means for Technologists

There’s no telling how many IT architects possess a great business idea, but are hesitant to leave their current place of employ to pursue their dream of becoming an entrepreneur.

That hesitancy may start dissipating soon, at least in the United States.

That’s because last week the Federal Trade Commission issued a final rule that will ban noncompetes nationwide.

The purpose of the rule, according to the FTC, is to protect “the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.”

The latter could be a big deal in the tech community.

The FTC estimates that the final rule banning noncompetes will lead to new business formation growing by 2.7% per year, resulting in more than 8,500 additional new businesses created each year.

“Noncompetes are a widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business,” according to the FTC. “Noncompetes often force workers to either stay in a job they want to leave or bear other significant harms and costs.”

Under the FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable. Existing noncompetes for senior executives – who represent less than 0.75% of workers – can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompetes against them.

Dr. Ege Can, a clinical assistant professor of economics in the University of Alabama in Huntsville (UAH) College of Business, has studied the impact of noncompetes on entrepreneurship. He believes the new rule “could boost business innovation.”

Can conducted a study, co-authored with Dr. Frank Fossen at the University of Nevada Reno, that examined proposed noncompete policy changes in Utah in 2016 and Massachusetts in 2018, where both states limited noncompetes to one year for all workers. The research is also thought to be the first individual-level analysis that separates self-employment with incorporated and unincorporated businesses as two different types of entrepreneurship to analyze the various effects of noncompetes. Their findings show the decrease in the enforceability of noncompetes in Massachusetts resulted in a higher rate of unincorporated entrepreneurship among low-wage workers. For Utah, the results indicate the reform increased both types of entrepreneurship.

“We wanted to see what impact the change in the enforceability of noncompete agreements had on self-employment and entrepreneurship,” Can notes. Noncompetes “have been a big topic in the last few years due to concerns that they restrict the mobility of workers. While much research concerning employees and many policy initiatives have emerged, few researchers have looked at potential effects on entrepreneurs.”

He added that with “this rule, low-wage workers can more freely start their own self-employed businesses or even put their existing innovative ideas into practice. States like California, which have long prohibited noncompetes, have been seen as more innovative tech hubs than states with stricter noncompete enforcement. This rule could potentially level the playing field nationally, fostering a broader geographic dispersal of tech innovation.”