The FTC is proposing a rule that would prohibit employee non-compete terms

The Federal Trade Commission on Thursday proposed a rule that would bar US employers from imposing non-compete terms on workers, a sweeping measure that could make it easier for people to switch jobs and deepen labor competition across a wide range of industries.

The proposed rule employers will be prevented from enforcing contract clauses that prohibit their employees from joining a competitor, usually within a certain period of time after leaving the company.

Proponents of the new rule argue that non-compete agreements lead to wage stagnation because one of the most effective ways to secure higher wages is to switch companies. They argue that dams have become so common that they have swept away even low-wage workers.

Opponents argue that by making retention easier, non-compete clauses have encouraged companies to invest in promoting workers and training, especially in a tight labor market. The public has 60 days to submit comments before the law takes effect.

During a Cabinet meeting, President Joe Biden called the FTC’s action “a big step forward in banning non-compete agreements designed simply to lower people’s wages.”

“These contracts prevent millions of retail workers, construction workers and other working people from getting better jobs and better wages and benefits in the same field,” Biden said.

Under the leadership of Chairman Lina Khan, the FTC has moved aggressively to curb the power of large corporations.a legal scholar and Washington outsider whose appointment by Biden signals a hard-line antitrust stance.

The agency estimates the new rule could raise wages by about $300 billion a year and expand career opportunities for about 30 million Americans.

“Non-competes discourage workers from freely changing jobs, deprive them of higher wages and better working conditions, and deprive them of the talent pool they need to build and expand businesses,” Khan wrote.

The FTC’s proposal comes amid an already competitive labor market. especially in industries that suffered massive layoffs in the first year of the COVID-19 pandemic and have since struggled to recall workers. Many workers leave for better pay, childcare or health issues, or early retirement.

“It has the potential to contribute to the ‘big resignation’ that everyone talks about to some degree, but employees are simply losing one of the tools in their toolbox and there are other ways to retain top talent,” said Vanessa Matsis-McCready, HR services provider for small and medium-sized companies. Associate General Counsel and Director of Human Resources at Engage PEO. “You’re going to see a lot of businesses trying to retain top talent through promotions or other fringe benefits.”

Despite high-profile job cut announcements, employers across the country are still hiring and layoffs are at historically low levels from companies such as software provider Salesforce, Facebook parent company Meta and Amazon. The government is expected to announce on Friday that employers added 200,000 jobs last month and unemployment is near a half-century low of 3.7%.

A 2019 analysis by the liberal Economic Policy Institute estimated that 36 million to 60 million workers could be subject to non-compete agreements, which the group said companies have increasingly adopted in recent years.

While such arrangements are common among higher-paid workers, the study found that a significant number of low-wage workers, including more than a quarter of those earning an average wage of less than $13 an hour, were exposed to them.

For example, on Wednesday, the FTC took action Against three companies for illegally imposing non-compete clauses on employees, including low-wage security guards, who were threatened with $100,000 in fines if they breached the contract.

The EPI investigation found that many companies still use non-compete clauses in several states that prohibit or restrict them, including California, where the practice has been banned for a century.

The proposed FTC rule would require companies to eliminate existing non-compete grounds and proactively notify employees that they no longer apply, as well as prohibit the introduction of new ones.

The proposal is based on a preliminary finding that non-compete clauses foreclose competition in violation of Section 5 of the Federal Trade Commission Act. This generally does not apply to other employment restrictions, such as non-disclosure agreements.

But Emily Dickens, chief of staff and director of public affairs for the Society for Human Resource Management, said the proposed FTC rule is overly broad and could potentially harm businesses that depend on them to thrive. He cited examples of very small, emerging industries where important know-how is not protected by non-disclosure agreements alone.

Dickens said SHRM, a group of more than 300,000 human resources professionals and executives worldwide, will encourage its members during the FTC’s comment period to present special circumstances that might justify non-compete clauses.

Although “there are jobs that don’t make sense to be uncompetitive,” Dickens said, “such prohibitions will stifle innovation.”

While advocates of non-compete clauses argue that they help startups and small businesses retain talent, opponents say they hinder those businesses from hiring.

The Economic Innovation Group, a Washington-based public policy think tank, applauded the rule and urged Congress to pass legislation that would make similar bans more permanent.

“Limiting the use of non-compete agreements is fundamentally good policy that will raise wages, improve labor mobility and encourage entrepreneurship and innovation throughout the economy,” said EIG President and CEO John Lettieri.


Associated Press writers Chris Rugaber and Nancy Benac in Washington contributed to this report.

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