Is the FTC ban on noncompete clauses good news for startups?

The Federal Trade Commission (FTC) recently announced that they are banning noncompete clauses. These contractual conditions previously prevented employees from being able to freely change jobs or start their own business in the same industry.

It’s estimated that 30 million Americans — that’s nearly one in five Americans — are subject to noncompete clauses across a broad variety of businesses. This includes industries you would expect, like the tech sector, but they are also used by some fast food restaurants. That’s right, fast food restaurants!

While noncompetes have prevented millions of Americans from seeking similar jobs elsewhere,  “at will” laws have simultaneously allowed U.S. employers to fire workers for essentially any reason (with some restrictions).

Betsey Stevenson, a professor of public policy and economics and former chief economist at the US Department of Labor, called the move by the FTC a “victory for the U.S. economy.”

Noncompetes have always created a power imbalance. Employers could lock in talent indefinitely and prevent them from taking their skills to a competitor. Workers that wanted to leave a company had few appealing options. If they took a similar job, or started a company in the same industry as their employer, they ran the risk of being sued. Now, with the exception of senior executives, employees are finally free to chart their career path without fear of a lawsuit.

Robert Reich, a Berkeley professor and former Secretary of Labor, applauded the decision, posting on X (formerly Twitter), “Noncompetes trap workers in their jobs and prevent them from using their skills to earn higher pay.”

That’s right, noncompetes also suppressed wage growth. Since employees were unable to accept a new job in their industry, employers had little incentive to offer higher wages. Now, companies will need to offer competitive salaries in order to attract, and keep, talented workers.

California Representative Katie Porter weighed in, tweeting, “Noncompete clauses prevent employees from taking a better job or starting a business within their industry. This keeps wages low, hurts employees, and discourages competition. Today’s move to ban these harmful contracts will help workers and our economy thrive.”

As Representative Porter pointed out, noncompetes stifled innovation, since hundreds if not thousands of entrepreneurs have been unable to found companies due to the restrictions imposed by a noncompete clause.

With the new ban in place, the FTC estimates that more than 8,500 startups will be created in the U.S. each year. Considering that 5.5 million new small-business applications were filed in 2023, the highest number on record, that might even be a conservative estimate.

Noncompetes have made it difficult for companies to find and hire talent bound by those agreements. The end of noncompetes will provide the perfect opportunity for businesses to hire U.S. workers with in-demand skills. This runs the gamut from major corporations and growing startups, to companies in other countries eager to take advantage of the experience and knowledge of American workers.

To be clear, the ban is getting pushback. While it was well-received by labor unions, several pro-business groups are opposed to the ban, and it’s being challenged in court by the U.S. Chamber of Commerce. However, if the challenge is unsuccessful, the ban will go into effect later this year. And that’s good news for entrepreneurs, American workers, and the businesses that want to hire them, both here and globally.