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FTC bans noncompete work clauses to encourage entrepreneurialism and higher pay

The ruling should bring about 8,500 new businesses per year and bolster innovation
FTC bans noncompete work clauses to encourage entrepreneurialism and higher pay
  • The FTC has issued a final rule to ban noncompetes, believed by many to have been holding the labour market back
  • It is expected that the average worker will earn $524 more in the US per year as a result

The US FTC has issued a final rule to ban noncompetes, protecting workers from what is often considered an exploitative clause. Many companies across a wide suite of industries use noncompete clauses in their work contracts - especially for top staff - meaning this ban will have major ramifications for all sorts of businesses.

Those in the games industry are no exception.

Traditionally noncompete agreements - preventing employees from taking similar roles with rival companies - have been a staple of tech and games. While clearly beneficial for the companies that include them in their contracts with employees - in the interests of keeping trade secrets and knowledge away from competitors - they're a career-limiting headache for employees preventing them from seeking and obtaining higher paid, better work elsewhere.

Now, banning noncompete clauses has been justified by the FTC as a measure to promote competition and nurture new business formation, estimating that 8,500 more new businesses (a 2.7% rise) will form each year in the US as a result. For employers in the games industry, this should also grant greater choice of applicants potentially ending the recently observed "skills shortage".

Of course, while this means that companies can bid an easier welcome to new, experienced staff, it could mean the loss of their own key staff as they too get set to jump ship…

Getting competitive

The FTC’s final rule is expected to mean higher earnings for employees as an incentive to keep their skills with their existing employer rather than take those skills to another. It is expected that the average worker will earn $524 more in the US per year, while healthcare costs could decrease by as much as $194 billion in the next 10 years.

An estimated 17,000 to 19,000 additional patents are expected to arise in the next decade too - from new ideas generated thanks to the removal of noncompetes - a share of which will naturally be within the world of video games.

While now running the risk of losing top staff and being forced to pay more to compete for a replacement is far from ideal on the employer’s side, the FTC notes in its ruling that businesses can still protect their sensitive information via NDAs, which over 95% of American workers have already signed.

The Commission also advises simply improving working conditions to keep staff satisfied.

The freedom to choose

"Noncompetes are a widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business. Noncompetes often force workers to either stay in a job they want to leave or bear other significant harms and costs, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave the workforce altogether, or being forced to defend against expensive litigation," the FTC said.

"An estimated 30 million workers - nearly one in five Americans - are subject to a noncompete."

Notably, existing noncompetes in place for senior executives (representing less than 0.75% of the workforce) can remain in place after the ban, but new noncompetes cannot be entered, and existing noncompetes for "the vast majority of workers" will be annulled.

The vote was won at three against two, and the final rule will come into place 120 on from its publication in the Federal Register.

"Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism," said FTC Chair Lina Khan. "The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market."

Earlier this month, the International Game Developers Association called for "sustainable measures" to stop mass layoffs and "stop driving talent away".