Holy shit I don’t think people are ready for how big of a deal this is:
The FTC voted 3 to 2 Tuesday to issue the rule it proposed more than a year ago. The new rule makes it illegal for employers to include the agreements in employment contracts and requires companies with active noncompete agreements to inform workers that they are void. The agency received more than 26,000 comments about the rule after it was proposed some 16 months ago. The rule will take effect after 180 days, although business groups have promised to challenge the rule in court, which could delay its implementation.
Back in my old job I spent some time researching why California, especially Silicon Valley, has such a lengthy history of business innovation. One answer I often cited was our state’s lack of enforceable non-compete clauses, something that goes back to 1876. (North Dakota and Oklahoma also have banned the practice for more than a century)
Harvard Business Review:
In the past decade, a wealth of research — empirical, experimental, and theoretical studies — offers compelling evidence about the key role that human capital policy, including noncompete contracts, plays in industries and regions. These studies overwhelmingly show that the harms of noncompetes extend not only to employees but to also companies and regional innovation. Noncompetes reduce market dynamism and interfere with a free market for labor. They make it harder to start new companies and cause industries to become more monopolized by incumbent firms. And they reduce employee motivation and knowledge sharing, the fundamental building blocks of innovation.
...
California and Massachusetts present a paradigmatic natural experiment on the effects of noncompetes. Massachusetts has long enforced noncompetes — and only recently in 2018 passed a law limiting their use, based on the mounting economic research about their harms. California has always deemed noncompetes void.
Both states were well positioned in the early 1970s to become the global high tech hub that Silicon Valley is today. Yet Massachusetts high tech companies’ use of noncompetes made it harder for talented employees to start their own ventures. By contrast, the computer industry accelerated in California, and inventor networks in the Bay Area became denser, even as it stagnated in Massachusetts around an older generation of companies.
What’s more, California as a whole benefited from its comparative policy advantage. It experienced brain gain, as the best talent worldwide was attracted to the freedom California offered. Existing companies benefited too, because a free labor market meant that companies who were doing well could hire new employees. And the state benefited from the tax base that a robust market economy could bring.
The FTC:
Noncompete clauses stifle new businesses and new ideas. Existing evidence shows thatnoncompete clauses hinder innovation in several ways—from preventing would-be entrepreneursfrom forming new businesses, to inhibiting workers from bringing innovative ideas to newcompanies. In markets with fewer new entrants and greater concentration, consumers face higherprices—as seen in the health care sector
But who gives a fuck about that, here’s the real deal:
Noncompete clauses significantly reduce workers’ wages. When employers use noncompete clauses to restrict workers from moving freely, they have the power to suppress wages and avoid having to compete to attract workers. Based on existing evidence, noncompete clauses also reduce the wages of workers who aren’t subject to non competes by preventing jobs from opening in their industry. According to FTC estimates, the proposed rule could increase workers’ earnings across industries and job levels by $250 billion to $296 billion per year. Researchers also find that banning non competes nationwide would close racial and gender wage gaps by 3.6-9.1 percent.
California’s success can be repeated on a national scale. This is big, big deal.
Back to WaPo:
Some observers fear that employers will also find workarounds to the FTC rule, but Vaheesan said that a federal rule will provide legal clarity and send a strong message.
“It establishes in the place of this mushy standard that exists in most states a bright line,” he said. “So everyone will know these contracts are illegal.”