Big Changes Loom on the Horizon for Entrepreneurship

The Federal Trade Commission (FTC) is expected to issue a final ruling next week on a proposal the agency made in January 2023 to ban noncompete agreements in the United States.

Noncompetes are contracts between an employer and employee that limit the worker’s ability to work for another company or start their own business in the same industry.

The FTC and others estimate that about one out of every five Americans is subject to a noncompete, including about 14% of workers earning less than $40,000/year. 

While proponents argue that noncompetes are necessary to protect companies’ intellectual property and investments they make in worker training, research suggests there are many negative economic impacts–including to entrepreneurship.

Research has found that enforcing noncompetes suppresses startup activity, reduces the rate at which these businesses create jobs, and reduces startup innovation. 

It can also be harder for new businesses that start in states that strictly enforce noncompetes to hire workers, since prospective employees may be locked into their current jobs by noncompete agreements.

States have historically set their own laws regarding noncompetes, with most states, including Missouri, enforcing these contracts. Only a handful of states ban noncompetes, though legislation has been introduced in many to restrict them.

California–home to the world’s greatest startup ecosystem–has long banned noncompetes. Some scholars cite this policy as one reason why Silicon Valley is a source of such innovation and startup activity.

This year, bills have been introduced in the Missouri General Assembly to ban noncompetes for hourly workers and restrict their use for physicians (here and here).

An FTC rule banning noncompetes would be a significant development, with widespread implications. Yet, future presidential administrations could modify or rescind the rule.

That means there will still be a role for state and federal legislators to decide the fate of these agreements by making any ban or restriction part of state or federal statute. 

NEXT Missouri will monitor the FTC’s vote on April 23 and keep our members informed.