US ban puts non-compete clauses in the spotlight

Non-compete clauses are under scrutiny - Newsreel
In the movie, Jerry Maguire took the gold fish and some clients. Non-compete clauses are under scrutiny after they were banned in the US. | Photo: Promotion picture from Jerry Maguire movie.

The future of non-compete clauses in employment contracts is under scrutiny after they were banned in the United States last week.

The US Federal Trade Commission (FTC) voted to outlaw the provision, that exists in large numbers of contracts, saying it would protect the “fundamental freedom of workers to change jobs”.

It said the decision would also increase innovation and encourage the creation of new businesses.

The FTC ruling has prompted fresh debate in Australia around the value of non-compete clauses with a series of review processes already underway.

The Federal Treasury’s Competition Taskforce is working on a consultation paper on the issue and Treasurer Jim Chalmers has flagged that the Government will review its policy position in coming months.

A report by Professor Allan Fels AO on the ACTU commissioned Inquiry into Price Gouging and Unfair Pricing Practices, released earlier this year, called for the clauses to banned. It said they had a “chilling effect” on employees who moved between firms and hampered the transfer of talent.

Non-compete clauses are common in contracts around the world as a means of preventing employees from changing employers and taking customers and employees with them.

The FTC in the US was concerned that the clauses were applying to an increasingly broader range of jobs and stifling employment prospects and reducing income.

FTC Chair Lina M. Khan said she expected the ban would lift business formation by 2.7 percent a year, creating 8500 new businesses and lifting worker earnings by an average of $524 a year.

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism,” Ms Khan said.

“The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

“Non-competes 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.”

Nearly one in five Americans—are subject to a non-compete clauses.

The FTC found that employers had several alternatives to the clauses, including non-disclosure agreements and laws protecting trade secrets.