The Federal Trade Commission on Thursday proposed a new rule banning the use of non-compete clauses in employee contracts, a change that would significantly increase workers’ bargaining power.
The proposal is based on the FTC’s finding that non-compete clauses violate fair trade laws, which the agency calls “a widespread and often exploitative practice that suppresses wages, stifles innovation and prevents entrepreneurs from starting new businesses.”
The FTC estimates that the new rule could raise wages by about $300 billion a year.
“Freedom to change jobs is fundamental to economic freedom and a competitive, thriving economy,” FTC Chairwoman Lina M. Khan said in a statement. “Non-competes prevent workers from moving freely, deprive them of higher wages and better working conditions, and deprive them of the talent pool needed to build and expand businesses. By ending this practice, the FTC’s proposed rule will encourage greater dynamism, innovation and healthy competition.”
Non-compete clauses — legal provisions that prevent employees from returning to work or starting a competing business for a certain period of time after they quit — are used in a variety of industries and business levels. Their use has increased in recent years, and many economists believe that they are an important factor in wage stagnation.
1 in 5 employees are bound by non-compete clauses, the FTC said.
According to a 2019 study by the left-leaning Economic Policy Institute, between a quarter and nearly half of all workers are subject to non-compete clauses.
President Joe Biden welcomed this step. “These contracts prevent millions of retail workers, construction workers and other working people from getting better jobs, better wages and benefits in the same field,” he told reporters Thursday.
Advocates of noncompetes see them as an incentive for companies, especially those in high-skilled jobs, to invest in workers with the convenience of paying those costs. They’re also a way to protect companies from leaking high-level, confidential information to competitors.
But some studies have shown that widespread use of noncompetes can hurt wages by limiting worker mobility and potentially limiting the competition that fuels the economy.
“First, noncompetes reduce the wages of low-wage workers,” said a study from the Federal Reserve Bank of Minneapolis. “Second, low-wage workers have less access to legal counsel than other workers, making it difficult for them to enter into fair, well-informed negotiations with their employers about their non-compete agreements.”
For two years, the company, which made more than 10% of its profits from sandwich sales, has been told non-compete terms at companies including sandwich chain Jimmy John’s and Amazon prevent workers from working for any company within three miles of the company’s store. even some temporary warehouse workers sign non-competes, according to a report in The Verge from 2015. Some summer camps have also used them and companies have even hired them during internships.
Jimmy John’s, which did not immediately respond to NBC News’ request for comment, agreed to drop the practice in 2016 under legal pressure from multiple state attorneys general. Amazon also did not immediately respond to a request for comment.
A study of more than 11,000 employees found that a third of them learned about non-compete terms only after accepting job offers – limiting their ability to bargain on the matter. A 2015 study published in the Journal of Law and Economics also found that only 10% of workers had negotiated a clause. Most thought it was either non-negotiable or would cause problems with their employers.
Kenneth Dau-Schmidt, an employment law expert at Indiana University, said non-compete clauses make sense when used mostly for employees in the highest-level jobs — CEOs and other executives, researchers and senior engineers — but measures that require their broader use .
“They have gone to ridiculous extremes and as a result have started to have a negative impact on our economy. “Our labor markets are less competitive than before.”
Dau-Schmidt expected the FTC’s proposal to receive pushback from the business community, saying it could become more narrowly targeted.
The agency voted 3-1 against the rule, with Trump appointee Christine Wilson voting against it. Wilson said he believes the rule is outside the FTC’s scope and would be vulnerable to legal challenges.
“The proposed Non-Competition Clause Rule represents a radical departure from hundreds of years of legal precedent that uses a fact-based inquiry into whether a non-compete clause is unreasonable in terms of duration and scope, given the business justification for the restriction,” he said. said in the statement.
The FTC will open a 60-day comment period for the proposed rule before finalizing it later this year.
Ted Sichelman, a law professor at the University of San Diego, wrote positively of the non-compete provisions, saying he believes the FTC’s proposal goes too far. Sichelman co-authored a prominent analysis of studies criticizing noncompetes, which he says are based on a misunderstanding of state law.
“Non-competes are very important to many companies, especially those that rely on trade secrets,” he said.
He said he would potentially support a rule that seeks to eliminate those who don’t compete for low-wage jobs.
The Chamber of Commerce condemned the FTC’s proposal and said it believed it would not hold up in court.
“Today’s action by the Federal Trade Commission to expressly ban non-compete clauses in all employer contracts is patently illegal,” said Senior Vice President Sean Heather. “The attempt to ban noncompetes in all employment settings overrides well-established state laws that have long regulated their use and ignores the fact that, when properly used, noncompete agreements are an important tool in promoting innovation and protecting competition.”
At least 10 states prohibit the use of non-competes for low-wage workers by reducing their wages. A 2021 study found that a ban on provisions for low-wage workers in Oregon helped raise wages by 2% to 3%.