In 2024, the FTC issued a sweeping rule banning nearly all non-compete clauses in U.S. employment contracts. The rule was largely blocked by the courts, but the policy debate it triggered hasn’t gone away — and several states have moved aggressively in the same direction. The intent was defensible: research has long shown that non-competes binding low-wage workers depress wages, restrict mobility, and serve no legitimate business purpose. The execution, though, swept in cases where a bright-line ban produces genuinely bad outcomes, particularly for small businesses that lack the legal arsenal of large employers.
The case the ban got right
Non-competes for hourly workers are indefensible. The research is unambiguous: a sandwich shop manager, a hairstylist, or a security guard locked out of their entire industry for a year after leaving a job has no plausible business justification working against them. These workers don’t carry trade secrets. They carry skills the market needs. State-by-state restrictions have demonstrably raised wages where they’ve been enforced. Banning these clauses for the bottom 70% of the wage distribution would have been straightforward and broadly popular.
Where the policy overreached
The problem is that the FTC’s rule didn’t stop at hourly workers. It extended to senior executives, engineers with deep proprietary knowledge, and — most consequentially for small business — founders selling their companies. A small acquirer paying $5 million for a four-person firm typically depends on the seller not immediately starting a competitor next door. That’s not labor suppression; it’s basic deal protection, and it’s how nearly all small business M&A actually works. Strip out enforceable non-competes and the price small acquirers can offer drops, which means many sales don’t happen at all.
Trade secrets and training investments
Small businesses also lack the resources to litigate trade secret violations after the fact. A 12-person engineering firm can’t afford a year of forensic discovery against a former lead engineer who walked across the street. Non-competes aren’t ideal, but they’re cheap and fast — a credible deterrent that doesn’t require a courtroom. Banning them shifts the cost of protecting proprietary work from contracts to litigation, and litigation favors whoever has the bigger legal budget. That’s not the small employer.
A narrower rule would have done the job
Most labor economists who support non-compete reform also support carve-outs for senior roles and acquisition contexts. California’s long-standing model — non-competes generally void, but trade secret protection robust and acquisition-related restraints permitted — has produced one of the most dynamic labor markets in the world without crippling small business sales. A federal rule that mirrored California, or that simply banned non-competes below a certain salary threshold, would have captured the wage and mobility gains without breaking small-business M&A.
The takeaway
The instinct behind the non-compete ban was right. The implementation was a blunt instrument applied to a problem that needed a scalpel. Reform should target the contracts that suppress wages without justification while preserving the narrow uses that make small business acquisitions possible. Otherwise the rule helps the workers it was designed for and quietly harms the founders and tiny firms it was never meant to touch.
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