Signature line: Russ Nelson
Newswise — April 23, 2024 The Federal Trade Commission (FTC) bans most non-compete agreements (NCAs) nationwide, citing a paper co-authored by researchers at the University of Alabama in Huntsville (UAH). The judgment has been announced. Dr. Ege Kang of his UAH School of Business, part of the University of Alabama System, studied the impact of NCAs on entrepreneurship and highlighted how banning NCAs fosters business innovation. The FTC estimates that the new rules will create more than 8,500 new businesses each year and increase the number of patents by an average of 17,000 to 29,000 per year over the next 10 years.
Professor Cann’s study, co-authored with Dr. Frank Fossen of the University of Nevada, Reno, is the first to use data from the American Community Survey, examining NCA policy changes in Utah in 2016 and Massachusetts in 2018. Both states limited the NCA period to one year. All workers. This study is also believed to be the first individual-level analysis to separate self-employment through incorporated and unincorporated businesses as two distinct types of entrepreneurship to analyze the differential effects of NCA. . Their findings show that lower NCA enforcement in Massachusetts led to higher rates of unincorporated entrepreneurship among low-wage workers. In the case of Utah, results show that the reform increased both types of entrepreneurship.
“We wanted to understand how changes in the enforcement of non-compete agreements would impact self-employment and entrepreneurship,” said Kang. “NCAs have been a hot topic in recent years due to concerns about restricting worker mobility.While many studies and many policy initiatives have been published regarding the workforce, the potential for entrepreneurs is Few researchers have considered the effects of
“New FTC rules will allow more U.S. workers to leave their current employer, join a competitor, or start a business without fear of legal repercussions from noncompete agreements. The rule is expected to increase worker mobility and eliminate most competitors nationwide, as changing jobs is often a path to higher wages and professional growth. This will create many new businesses and encourage innovation, additional patents and entrepreneurial activity.”
The FTC estimates that banning most anti-competitive practices would impact approximately 30 million Americans and increase wages by more than $300 billion annually.
“This rule gives low-wage workers more freedom to start their own business or implement existing innovative ideas,” Cann said. “States like California, which have long prohibited non-competes, have been seen as more innovative technology hubs than states with stricter non-compete enforcement. This rule has made it more competitive across the country. It could level the playing field and encourage a broader geographical distribution of innovation.”
Some states have new restrictions that prohibit or limit NCAs, including many non-solicitation agreements, although they do not prohibit all non-competes.
“In addition to the one-year restriction, Massachusetts has completely banned NCA for most low-income workers,” Cann says. “As a result, after the ban on low-wage noncompete agreements, low-wage workers in Massachusetts were more likely to start unincorporated businesses.”
Researchers report that the enforceability of non-compete agreements can vary widely from state to state. “For example, non-compete agreements are not enforceable in California, but they are enforceable in Texas,” Cann said. “I don’t think non-compete agreements are necessarily the main factor hindering business opportunities, but generally speaking, non-compete agreements have a negative impact on innovation and entrepreneurship. Other federal and state-level policies also impact entrepreneurship.
“More than half of an entrepreneur’s ideas are generated during their previous employment,” Kang points out. “If incumbent firms are reluctant to pursue radical innovation, NCAs can hinder innovation by blocking spin-offs that generate innovative entrepreneurial activity.”
The final rule becomes effective 120 days after publication in the Federal Register.
