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The Federal Trade Commission proposed a new rule that would ban noncompete clauses nationwide, which, if approved, could help many aspiring entrepreneurs launch startups.
Noncompete clauses are the terms many employers put in worker contracts to prevent them from going to a competitor or starting a similar business. In a recent New York Times op-ed, the FTC chair Lina Khan wrote that noncompetes "make markets less competitive, rather than encouraging dynamism and new ideas."
"How can a new business break into the market if all of the qualified workers are locked in," Khan wrote. "Or if the would-be founder is bound by a noncompete?"
If approved, the ban would affect one out of five US workers and could create more opportunities for entrepreneurs, according to the FTC. Studies by the scholarly journal Management Science and the University of Chicago have found that noncompetes restrict innovation, thus discouraging new business formation. Plus, startups are "a key driver of job creation and innovation," Khan wrote in her op-ed.
"We could see a significant number of those people actually start new businesses or switch jobs," said Victor Hwang, the founder and CEO of Right to Start, a nonprofit that advocates for policy changes to make entrepreneurship accessible to more Americans.
While noncompetes are typically considered a tech-industry standard, they have infiltrated nearly every other industry, Hwang said.
"I've seen them in software engineering, retail, financial services, manufacturing, hospitals, medical professions," he added.
The terms of a noncompete clause can be broad and sweeping, stating an employee cannot work for or start a competing company for several years, or sometimes in their lifetime. Plus, many workers are either not aware that noncompete clauses were in their contracts or signed after accepting a job offer when they are less likely to object, a researcher told the FTC.
"There's a question of how much these contracts are enforceable, but people get scared off," Hwang said. "Not everyone's going to afford the legal fees to actually fight through courts."
As far as Hwang is concerned, the FTC's ban on noncompetes is a welcome change, but it won't have the lasting effect that federal and state legislation does. If the FTC approves the ban, it could just as quickly be reversed when new leaders come into power.
Hwang sees the FTC's move as a natural extension of the work happening at the state level over the past couple of decades.
California, Oklahoma, and North Dakota do not enforce most noncompete agreements. In 2015, Hawaii banned noncompetes in the tech industry and in 2021, Oregon modified existing legislation, limiting noncompetes to employees with a minimum annual salary of six figures.
"We have seen increases in startup rates, salaries, and worker mobility," Hwang said of Hawaii and Oregon.
Banning noncompetes is just one of the policy changes that Right to Start has campaigned for at the state level. In 2021, Missouri was the first state to pass the "Right to Start" act, which granted more government contracts and lowered tax rates for young startups, as well as voided noncompete clauses.
And more legislation is expected in 2023. "We actually are getting ready for a significant wave of Right to Start Acts across the country this year," Hwang said.
