FTC bans noncompete clauses nationwide

The new ban was handed down to increase innovation’ and ‘foster business formation,’ the FTC said, and one group has already vowed to fight it in court

The Federal Trade Commission (FTC) announced on Tuesday a decision to ban noncompetes nationwide, aiming to stop the practice of preventing a worker from immediately joining a rival company.

The rule is designed to “[protect] the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation,” the FTC said in its announcement of the rule.

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC Chair Lina Khan in a statement. “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.”

The FTC claims that doing away with noncompetes will help more entrepreneurs to create more businesses, resulting in 2.7% more business incorporations on an annual basis, or roughly 8,500 new businesses each year. The FTC also asserts that earnings for workers will rise by an additional $524 per year and that healthcare costs could fall by “up to $194 billion over the next decade.”

“In addition, the final rule is expected to help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years under the final rule,” the FTC claimed.

The rule would also apply retroactively to existing noncompetes as of the effective date, which is 120 days following the rule’s publication in the Federal Register, which is expected in the next few days. The U.S. Chamber of Commerce has vowed to take legal action against the FTC, according to a statement calling the ban “an unlawful power grab.”

The rule follows through on an Executive Order issued by President Joe Biden in the summer of 2021, who directed the FTC to ban or limit such agreements in the U.S. labor force.

It’s not common practice in the mortgage and real estate industries to make use of noncompetes. In the housing space, non-competes are more likely to affect executives than rank-and-file employees. Most real estate agents are freelance employees, but some mortgage loan officers, account executives and marketing personnel are bound by such agreements.

Some loan originators may be bound by noncompetes if their employment agreements are tied to compensation, Kevin Peranio, chief lending officer at PRMG, said in a 2021 HousingWire interview.

Jim Clapp, president of Certainty Home Lending, added at the time that “non-solicitation” clauses which “state that an LO or employee cannot solicit employees from the departing company for a set period like six months or one year” are far more prevalent in the mortgage industry than non-competes.

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