Home Business Antitrust regulators have proposed banning non-compete clauses for employees

Antitrust regulators have proposed banning non-compete clauses for employees


The Federal Trade Commission on Thursday proposed a rule that would ban employers from imposing non-compete terms on workers — a widespread practice that economists say suppresses wages, discourages new companies and raises consumer prices.

The ban would make it illegal for companies to enter into non-compete agreements with employees or maintain such agreements when they exist, and would require companies with active non-compete clauses to notify employees that they are invalid. Such contracts usually prevent employees from finding employment with a competitor of the current or former employer for a certain period of time.

The FTC estimates that banning non-compete agreements would create new job opportunities for 30 million Americans and raise wages by $300 billion a year. If passed into law, the rule could send shock waves across a wide range of industries.

In 2014, a widely cited survey of economists found that nearly 20 percent of workers in the United States owed noncompete clauses in jobs ranging from barbers to software engineers to nurses. These contracts forced workers to take on huge amounts of debt during long-term job searches, driving workers out of their professions or into lower-paying industries.

The proposed rule, recommended by President Biden as part of his 2021 executive order, is the FTC’s first major push to expand the boundaries of America’s antitrust enforcement. workers.

FTC Chairwoman Lina Khan, a Biden appointee, has pledged to “use every tool in our toolbox” to rein in companies’ anticompetitive behavior, saying the rule is now being proposed because of “a lot of economic evidence.” the ways in which non-competition clauses harm competition’.

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“Non-competes are basically locking out workers, which means they can’t match the best jobs for them,” Khan said in a call with reporters Wednesday afternoon. “If this rule is finalized and goes into effect… [it] would force employers to compete more vigorously for workers, which should lead to higher wages and better working conditions, creating a more competitive labor market.”

The proposed rule is based on a preliminary finding that non-competitive clauses violate Section 5 of the Federal Trade Commission Act, which prohibits “unfair” methods of competition. The FTC is seeking public comment on the proposed rule for 30 days, but has not disclosed a timetable for its approval.

Under its current Democratic majority, the FTC voted 3-1 to publish a notice of proposed rule, the first step in its rulemaking process.

The prospect of banning non-compete agreements was met with some reaction from the business community. In a 2021 letter to the FTC, the U.S. Chamber of Commerce wrote that the agency “does not have the statutory authority” to impose a rule that “would harm consumers by prohibiting the anticompetitive aspects of non-competes.”

A record tight labor market fueled by supply chain shortages and the coronavirus pandemic has forced many companies to raise wages and improve conditions over the past year as workers have used their leverage to quit and change jobs, such as in low-wage industries. Hospitality. But workers covered by non-compete clauses do not have the same power because the labor market in such jobs is artificially restricted.

A growing body of research shows that non-compete agreements reduce workers’ wages and mobility across industries so that employers don’t have to compete with each other for workers by raising wages or improving working conditions.

The use of non-compete clauses goes back hundreds of years. Such restrictions were originally intended to protect business trade secrets, but they have become commonplace in labor contracts, especially in recent years — for low-wage workers, white-collar workers and executives — allowing companies to benefit from less competition overall.

The proposed rule would not apply to other types of employment restrictions, such as nondisclosure agreements, but those provisions could be subject to the FTC’s rules if the agency determines that they prevent employees from changing jobs. This would also apply to independent contractors and non-compensated workers, such as unpaid interns, in addition to employees.

Several states, including California, Oklahoma and North Dakota, have already banned non-compete agreements. Other states have banned such provisions for workers earning below a certain income. The data shows that workers in these states with bans have seen greater wage growth and greater job mobility than when noncompetes were legal. Some observers believe that the rise of California’s Silicon Valley as a global center for tech innovation has been aided by the state’s reluctance to enforce non-compete agreements.

Still, many employers continue to ask workers to sign non-compete agreements in states where the practice is prohibited, in part because low-wage workers are unaware of their rights. Enforcement of these regulations may be a challenge moving forward as the FTC grapples with its limited resources.

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Khan said he was confident the agency would be able to force companies to comply with the rule if it were enacted.

“Right now, companies can still cram these into contracts and think, ‘Hey, they’re not going to know what these workers’ legal rights are,'” Khan said. “All of this would be hampered by firms having to proactively inform employees and provide them with clear notice.”

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