Non-compete agreements are coming to an end in the United States: Can this "shackle" in the workplace be completely broken?

In the workplace, non-compete agreements have always been a controversial issue. They are designed to protect a company's trade secrets and customer relationships, but are often abused and become a "shackle" that restricts employees' freedom to develop. However, on the other side of the ocean, Lena Khan, the leader of the FTC, is pushing for a reform of non-compete agreements.

As the chair of the Federal Trade Commission (FTC), Lena Khan is not only an advocate against monopolies, but also a driver of antitrust investigations and lawsuits against tech giants. Shortly after taking office, she led the antitrust lawsuit against Facebook's acquisitions of Instagram and WhatsApp, and subsequently initiated antitrust lawsuits against companies such as Meta and Amazon.

Now, she has raised the banner of breaking the shackles in the workplace for workers. On April 23, local time, Lena Khan's FTC announced a comprehensive ban on all employees (including senior management) from signing new non-compete agreements.

The ban on non-compete agreements by the FTC led by her is expected to bring a series of positive impacts: a 2.7% increase in the establishment of new businesses, the addition of 8,500 new businesses annually, an average annual increase of 17,000-29,000 patents, and an additional average annual income of $524 (about 3796 yuan) for employees in the next ten years, injecting more vitality into innovation and the labor market.

The FTC's ban on non-compete agreements has attracted widespread attention at home and abroad. Will it lead to a re-examination and reform of non-compete agreements in the domestic workplace?

After all, although non-compete agreements are necessary to protect company interests, the restrictions and troubles they impose on employees cannot be ignored. In the future, if domestic non-compete protection can become more refined and rational, perhaps a more balanced solution can be found between employees' freedom of development and the protection of business opportunities, awakening more entrepreneurial drive and innovation vitality.

01 FTC: Comprehensive Ban on Signing New Non-Compete Agreements

On April 23, local time, the Federal Trade Commission (FTC) announced a comprehensive ban on all employees (including senior management) from signing new non-compete agreements in order to protect workers' basic freedom to change jobs, enhance innovation, and promote the establishment of new businesses.

For existing non-compete agreements, the existing non-compete agreements of senior management will remain valid, while other employees will no longer be enforced after the effective date of the regulation. The definition of "senior management" is individuals with income exceeding $151,164 and in decision-making positions, a group that currently accounts for less than 0.75% of the total workforce. This rule will take effect 120 days after its announcement.

Why does the FTC prohibit non-compete agreements?

The establishment of non-compete agreements was originally intended to protect a company's trade secrets and maintain relationships between the company and its customers, and its history can be traced back several centuries. However, over time, in many industries, some employers have begun to distort the original intent of non-compete agreements. They often formulate more broad and even astonishing terms, even if these terms may not be strictly enforced in practice, this practice has actually violated the original intention of non-compete agreements to protect business interests and customer relationships to a certain extent.

The FTC states that "non-compete agreements are a widespread exploitative practice that imposes contractual conditions that prevent workers from accepting new jobs or starting new businesses. Non-compete agreements often force workers to either stay in the job they want to leave, or to bear other significant harm and costs, such as being forced into lower-paying fields, forced to relocate, forced to leave the labor market entirely, or forced to defend expensive litigation."

FTC found that non-compete clauses often have a negative impact on the competitive conditions of the labor market by suppressing effective matches between workers and employers. In addition, non-compete agreements often have a negative impact on the competitive environment of product and service markets, suppressing the formation of new businesses and innovation activities. There is also evidence that non-compete clauses lead to increased market concentration, which in turn drives up consumer prices.

According to FTC Chair Lina M. Khan, on the one hand, non-compete clauses keep workers' wages at a low level for a long time, suppress the birth of innovation, and deprive the economy of vitality. On the other hand, once non-compete clauses are prohibited, it is expected that more than 8,500 new entrepreneurial companies will be established each year. "The FTC's final rule prohibiting non-compete clauses will ensure that workers have the freedom to pursue new jobs, start new businesses, or bring new ideas to the market."

FTC estimates that by implementing the final rule prohibiting non-compete clauses, the annual growth rate of new businesses will reach 2.7%, which means that more than 8,500 new businesses will be added each year, and workers' income will increase. It is estimated that the average annual income per worker will increase by $524. In addition, in the next 10 years, this rule is expected to significantly reduce healthcare costs, up to $194 billion. At the same time, the rule is expected to have a positive impact on innovation, with an average of 17,000 to 29,000 new patents added each year in the next 10 years.

This rule was initially proposed in January 2023. During the 90-day public comment period, the FTC received over 26,000 comments on the proposed rule, with over 25,000 comments supporting the FTC's proposed ban on non-compete clauses. It can be seen that the public has long been suffering from non-compete clauses.

The rules formulated by the FTC also point out some alternative methods to non-compete agreements, such as trade secret laws and confidentiality agreements. These alternative solutions can help employers protect their proprietary information and other sensitive information without restricting the freedom of workers.

Where should domestic non-compete agreements go?

Amazon has previously filed lawsuits against many employees who switched jobs. For example, in 2014, 2019, and 2020, it filed three lawsuits against former employees who joined Google. Google also claimed $1.79 billion in damages from a former star engineer at Waymo, a self-driving car company.

In China, non-compete agreements have also been a long-standing issue. Many employees have been restricted and troubled by non-compete agreements. Companies such as Tencent, Baidu, ByteDance, and Pinduoduo have initiated non-compete agreements against former employees, seeking individual compensation ranging from hundreds of thousands to millions. The cases involve not only senior employees and management, but also new employees.

Although companies generally pay a certain amount of money as "non-compete compensation" to balance the employees' execution of the agreement, so that individuals who violate the agreement can return the compensation or even bear the compensation for violating the agreement, this is supported by law. However, because companies are the stronger party, they can even make signing a non-compete agreement a condition for joining the company, and have the initiative to continuously expand the scope of non-compete, this seemingly fair agreement is actually very passive for individuals, and even unfair in reality.

If non-compete agreements in China are also abolished, will it bring some positive changes to the business society in addition to making individuals more free?

First, eliminating non-compete agreements will bring greater job freedom and flexibility to employees. In the current situation, many employees are restricted and troubled by non-compete agreements, and even face liquidated damages when changing jobs.

Undoubtedly, if these restrictions are lifted, employees can more freely choose the jobs they want or are suitable for, thereby releasing more work capacity and creativity to the market, thereby improving the flexibility and efficiency of the entire labor market.

However, the consideration of whether to keep or abandon non-compete agreements should not be unilateral. After all, after companies have cultivated employees, if they are easily poached by competitors, it may lead to the loss of the company's core know-how and competitive advantages, which is unfair to the company. Therefore, a balance needs to be sought between companies protecting trade secrets and competitive positions and employees seeking personal development.

For example, in protecting a company's sensitive information and core competitiveness, legal constraints can actually be imposed at the level of intellectual property. Currently, the execution of some non-compete agreements in China is too broad and rigid, thereby restricting employees' career development and even seriously affecting their professional survival and growth in certain situations. Essentially, this means that companies have chosen the simplest and crudest way to protect themselves without truly defining what they need to protect.

For example, in practical operations, many companies' non-compete agreements do not define the work that employees are actually involved in and the impact on the company in a layered manner. As a result, the non-compete restrictions may encompass almost all companies in the same industry, making it very difficult for employees to continue their careers in the same industry once they leave their original company. This broad restriction is obviously unreasonable because not all employees have access to the company's confidential information, and not everyone joining a competitor will fundamentally affect the original company's competitive position.

In the future, the issue of non-compete protection does need to be more refined and rational. The FTC's prohibition of non-compete agreements may also promote further consideration of non-compete agreements in the domestic workplace.

Perhaps in the near future, a more balanced and reasonable responsibility can be found between domestic companies and employees, and the enthusiasm for innovation and entrepreneurship can be awakened more. After all, in the current environment, many people may be constrained by non-compete agreements and unable to unleash their experience and accumulated abilities. But if these restrictions disappear, more entrepreneurial drive and innovative vitality will be unleashed, which would be a good thing for China's technology industry.