The US Federal Trade Commission’s new rule banning non-compete clauses in employment contracts is predictably being challenged by business lobbies who argue that employers need such tools to protect trade secrets and investments in training. But the evidence overwhelmingly shows that such restrictions do far more harm than good.
CHICAGO – Last week, the US Federal Trade Commission issued a rule banning provisions in employment contracts that forbid employees to work for a competitor after they quit or are fired. Within hours, a Texas firm sued to block the rule, and the following day, the US Chamber of Commerce, a business lobby, sued as well.
But the FTC’s rule is based on a mountain of empirical evidence showing that non-compete clauses harm workers, consumers, innovation, and employee mobility. Moreover, they are already regulated in most states, and banned in a few – including California, home of Silicon Valley, the single most innovative place in the world.
Businesses argue that they need non-compete clauses to prevent employees from stealing proprietary information. Suppose a distributor has compiled a list of customers after years of outreach. An employee may be tempted to take the list to another firm and, for a higher wage, use it to poach customers from their previous employer. Businesses also argue that non-compete clauses protect investments in training. Suppose a firm teaches new employees how to use accounting software. If the employees can immediately move to another firm, they can obtain a higher wage because they require no training at the firm that hires them.
CHICAGO – Last week, the US Federal Trade Commission issued a rule banning provisions in employment contracts that forbid employees to work for a competitor after they quit or are fired. Within hours, a Texas firm sued to block the rule, and the following day, the US Chamber of Commerce, a business lobby, sued as well.
But the FTC’s rule is based on a mountain of empirical evidence showing that non-compete clauses harm workers, consumers, innovation, and employee mobility. Moreover, they are already regulated in most states, and banned in a few – including California, home of Silicon Valley, the single most innovative place in the world.
Businesses argue that they need non-compete clauses to prevent employees from stealing proprietary information. Suppose a distributor has compiled a list of customers after years of outreach. An employee may be tempted to take the list to another firm and, for a higher wage, use it to poach customers from their previous employer. Businesses also argue that non-compete clauses protect investments in training. Suppose a firm teaches new employees how to use accounting software. If the employees can immediately move to another firm, they can obtain a higher wage because they require no training at the firm that hires them.