Federal ban on noncompetes would ‘unleash’ entrepreneurs, open door to more startups, advocate says

A proposed rule change that would stop employers from imposing and enforcing contract clauses to limit their workers’ ability to change jobs within their fields is being hailed as a “vital step on the path to expanding economic growth in the United States,” according to one Kansas City-based advocate for entrepreneurs.

Earlier this month, the Federal Trade Commission issued a new proposed rule that would ban noncompete clauses — restrictions that typically prevent employees from moving to jobs at rival firms or like businesses for a certain amount of time after their employment ends.

Victor Hwang, Right to Start

“The FTC’s proposed rule supports unleashing entrepreneurial activity in America,” said Victor Hwang, founder and CEO of Right to Start, a national nonprofit working to advance entrepreneurial opportunity as a civic priority.

“Noncompete clauses have long been a barrier in the way of entrepreneurs, despite the fact that new and young businesses create nearly all new job growth in America,” he continued. “Noncompete clauses or agreements stifle competition, undermine innovation, limit job growth, and restrict wages.”

The FTC estimates the rule change could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans — opening employees’ potential to move to better-paying jobs in their fields or negotiate for higher wages at their current employers.

“Evidence shows that noncompete clauses also hinder innovation and business dynamism in multiple ways — from preventing would-be entrepreneurs from forming competing businesses, to inhibiting workers from bringing innovative ideas to new companies,” the FTC said in a press release announcing the proposal. “This ultimately harms consumers; in markets with fewer new entrants and greater concentration, consumers can face higher prices — as seen in the health care sector.”

The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid, according to the FTC. It would also require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect.

The agency is seeking public comment on the proposed rule, which is based on a preliminary finding that noncompetes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.

In July 2021, President Biden issued an executive order that encouraged the FTC to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

Critics of the rule change that was ultimately rolled out Jan. 5 by the FTC argue it removes a key protection for intellectual property and internal practices, as well as damages businesses’ ability to retain top talent and threatens the return on investment for those companies that have paid to train workers into their existing roles. The Wall Street Journal characterized the proposal as a “favor” to labor unions, which long have called for an end to noncompete clauses.

The public has about 60 days to comment on the proposed rule change before it becomes final. It could take effect within 180 days of its publication in the Federal Register, barring any legal challenges that could delay or halt the new rule, according to the New York Times.

Hwang and the FTC noted about 20 percent of American workers are impacted by noncompete clauses, with the Right to Start leader pointing to research from the Ewing Marion Kauffman Foundation that details the impact of noncompete restrictions.

Click here to explore additional research in Right to Start’s Field Guides for Policy makers.