What the proposed ban on non-compete clauses means for you

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Sometimes non-compete clauses get in the way. These agreements are designed to protect the investments companies make in their businesses and employees. It is estimated that more than 30 million workers, or about 18% of the US workforce, must sign before being hired.

The agency reports that the US Federal Trade Commission recently proposed a new rule to ban non-compete clauses in labor contracts that suppress wages, stifle innovation and prevent entrepreneurs from starting new businesses.

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The proposed rule would also require companies with existing non-compete agreements to terminate them and notify current and former employees of the termination.

“That’s part of what makes this so radical,” said Michael Schmidt, a labor and employment attorney at Cozen O’Connor in New York. Only “the federal government takes this action widely, but with virtually no exceptions.”

As a result, the impact will be felt by companies with employees managed by non-competes, as well as companies looking to hire employees terminated by non-competes, said Benjamin Dryden, a partner at Foley & Lardner in Washington. antitrust issues related to labor and employment.

“This regulation will affect more or less every business in the country,” he said.

Non-competes are increasingly used in the industry

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“Noncompetes prevent workers from freely changing jobs, deprive them of higher wages and better working conditions, and deprive them of the talent pool needed to build and expand businesses,” FTC Chairwoman Lina Khan said in a statement.

In many cases, noncompetes affect white-collar workers in fields such as finance and technology, but they are increasingly used in a wide range of industries, “from hairdressers and warehouse workers to doctors and business executives,” he said.

A report from the White House and the US Treasury Department found that 15% of workers without a college degree were subject to non-compete agreements, as were 14% of workers making less than $40,000.

A ban could raise wages by about $300 billion a year and narrow the wage gap between white workers and minorities, as well as between men and women.

If passed, the regulation would “open up more competition between companies for workers,” said Najah Farley, senior staff attorney at the National Employment Law Project.

Non-competes undermine wages and working conditions by eliminating one of the most effective means of improving the quality of workers’ work—supporting or moving to a better job.

Najah Farley

Senior Associate at the National Employment Law Project

“Employers have taken advantage of the lack of laws and regulations in this area to push these contracts on unsuspecting workers at all income levels and job titles,” Farley said.

“Non-competes undermine wages and working conditions by eliminating one of the most effective means of improving the quality of workers’ work – promotion or transfer to a better job,” he said.

“Used appropriately, non-compete agreements are an important tool for promoting innovation and protecting competition,” said Sean Heather, senior vice president for international regulatory and antitrust affairs at the US Chamber of Commerce.

An outright ban is “blatantly illegal,” Heather said. “Congress has never given the FTC anything close to the authority it needs to promulgate such a competition rule.”

The proposed regulation still has several steps to go into effect, including “inevitable litigation” challenging the FTC’s authority, Schmidt warned.

According to Schmidt, the rulemaking process could take a year or more if it ends up in the court system.

What should employees do now?

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Employees affected by noncompetes should submit comments to the FTC about the proposed rule, Farley recommended.

The comment period is open until March 10, and the FTC will review each submission and make changes based on that feedback. “The more people who post comments, the better,” he said.

What should employers do now?

Companies should also take advantage of the FTC’s 60-day comment period and “make their voices heard,” Schmidt advised.

Dryden said it means “constructive process”. “If you think this would harm your legitimate business, please send comments to the FTC explaining your views.”

“I wouldn’t be surprised if the FTC reduced this regulation,” he said.

Still, Dryden said, “there was an obvious push for it.” In fact, many states have restrictions on non-compete agreements, and not surprisingly, the federal government is testing a blanket ban under Section 5 of the FTC Act, which prohibits unfair practices of competition.

“It’s too early for businesses to take any drastic action, but companies need to be aware that this is a real risk,” Dryden said.

For now, “use this as a reason to look at how you protect your business as an organization,” Schmidt advised. There may be other agreements that can achieve the same goal, such as non-disclosure or non-solicitation agreements.

“Even if this FTC rule ultimately doesn’t survive, state and local governments are becoming more proactive,” he said.

“We’re going to continue to see this trend of restrictions and limitations, whether by state legislatures or state attorneys general.”

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