United States bans harmful non-competition clauses

Today the United States Federal Trade Commission (FTC) has introduced a comprehensive ban on non-competition clauses (NCCs) under the new “Non-Compete Clause Rule”. The ruling introduces a complete ban of all new clauses in the U.S. and renders those in existence void for 99% of workers, with the exception being senior executives defined within the new law. The rule will become effective as of August 2024.

The ruling comes after an FTC proposal in January 2023, which called for comprehensive research and public consultation on policy options to address the use of NCCs, where several states have posed limitations or bans on their use. The outcome of this research found NCCs to be considered as an unfair method of competition, leading to the final ruling.

While Competition Commissioner Margrethe Vestager eluded to “looking into” the regulation of NCCs in Europe in early 2023, the Commission has not publicly taken steps forward in this area. Nearly all Member States regulate NCCs to some degree on a national level, but the regulation is fragmented, with these clauses often used more extensively or in an illegitimate manner. As many of the clauses rely on psychological impact on workers rather than enforceability, they have a profoundly detrimental impact on mobility.

Aside from this consequence, NCCs have been found to hurt workers’ wages, reduce entrepreneurship, slow innovation and negatively impact the economy at large. The U.S. ban is expected to have a number of significant positive impacts, including

• An annual average rise of worker’s earnings by an extra 524 USD.
• A 2.7% increase in new businesses being formed annually.
• An expected rapid rise in innovation, estimated to materialise in 17 000 – 29 000 patents annually (in comparison, the EU number of annual patents stood at 193 460 in 2022).

European studies have shown that the Single Market would likely reap similar benefits on banning NCCs. The macroeconomic impact of such clauses in the EU is not comprehensively mapped, but national level research leads us to believe that between 10% and 20% of workers in the EU are subject to NCCs.  While they are used extensively to limit mobility (in particular in the case of many Professionals and Managers), NCCs are also commonly used in the working contracts of other categories of workers throughout Member States.

Eurocadres will continue our research into the subject, with a White Paper expected in the coming months.