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Antitrust regulators propose banning noncompete clauses for workers

The Federal Trade Commission says the move would open new job opportunities for 30 million Americans and raise wages by $300 billion a year

FTC Chair Lina Khan said the rule is being proposed because of “a raft of economic evidence” that now shows “the ways that noncompete clauses undermine competition.” (Saul Loeb/Pool/Reuters)
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The Federal Trade Commission proposed a rule Thursday to prohibit employers from imposing noncompete clauses on workers — a widespread practice that economists say suppresses pay, prevents new companies from forming and raises consumer prices.

The ban would make it illegal for companies to enter into noncompete contracts with employees or continue to maintain such contracts if they already exist, and it would require that companies with active noncompete clauses inform workers that they are void. Such agreements typically prevent workers from getting jobs at a competitor of a current or former employer for a defined period.

The FTC estimates that banning noncompete contracts would open new job opportunities for 30 million Americans and raise wages by $300 billion a year. If enacted, the rule could send shock waves across a wide range of industries.

One widely cited survey of economists from 2014 found that close to 20 percent of workers in the United States are bound to noncompete clauses across a variety of jobs, from hairstylists to software engineers to nurses. These contracts have forced workers to take on loads of debt during lengthy job searches, locked workers out of their own professions or shunted them into lower-paying industries.

The proposed rule, recommended by President Biden as part of a 2021 executive order, is the FTC’s first big shot at stretching the boundaries of antitrust enforcement to empower American workers.

FTC Chair Lina Khan, a Biden appointee who has promised to “use all of the tools in our toolbox” to rein in anticompetitive behavior from companies, said the rule is being proposed because of “a raft of economic evidence” that now shows “the ways that noncompete clauses undermine competition.”

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“Noncompetes are basically locking up workers, which means that they’re not able to match with the best jobs for them,” Khan said on a call with reporters Wednesday afternoon. “If this rule were to be finalized and go into effect … [it] would force employers to compete more vigorously over workers in ways that should lead to higher wages and improved working conditions, basically injecting competition into the labor market.”

The proposed rule is based on an initial finding that noncompete 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 it has not disclosed a timeline for its approval.

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

President Biden applauded the FTC’s proposed rule that builds on his executive order.

“The Federal Trade Commission is going to take a huge step forward in banning non-compete agreements that are designed simply to lower people’s wages,” Biden said during a Cabinet meeting. “The bottom line is, I believe our economic vision is working.”

But the prospect of the ban has been met with outrage from some parts of business community — including the U.S. Chamber of Commerce, which maintains that noncompete agreements promote competition and innovation.

“Actions by the Federal Trade Commission to outright ban noncompete clauses in all employer contracts is blatantly unlawful,” Sean Heather, a U.S. Chamber official, said in response to news of the proposed rule. “Since the agency’s creation over 100 years ago, Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule.”

A record tight labor market fueled by supply chain shortages and the coronavirus pandemic has forced many companies over the past year to raise wages and improve conditions, as workers have used their leverage to quit and change jobs, especially in low-wage industries, such as hospitality. But workers covered by noncompete clauses haven’t had the same power because the labor market in such jobs has been artificially constrained.

A growing body of research shows that noncompete contracts reduce wages and mobility for workers across various industries by ensuring that employers do not have to compete against one another for workers by raising wages or improving working conditions.

The use of noncompete clauses dates back hundreds of years. Such restrictions were originally meant to protect a business’s trade secrets, but they have become especially commonplace in employment contracts in recent years — for low-wage workers, white-collar workers and executives alike — allowing companies to benefit from less competition across the board.

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 rule if the agency determines that they prevent workers from switching jobs. It would extend beyond employees to independent contractors and uncompensated workers, such as unpaid interns.

A few states have already banned noncompete contracts, including California, Oklahoma and North Dakota. Other states have banned such clauses for workers who earn below a certain income. Data shows that workers in these states with bans have seen larger wage increases and more job mobility than when noncompete clauses were legal. Some observers suggest that the rise of Silicon Valley in California as a global hub of tech innovation was helped along by the state’s unwillingness to enforce noncompete contracts.

Still, many employers continue to ask workers to sign noncompete contracts in states where the practice has been prohibited, in part because low-wage workers remain unaware of their rights. A challenge going forward may be enforcing these rules as the FTC grapples with its own limited resources.

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Khan said she’s confident in the agency’s ability to make companies follow the rule if it is enacted.

“Companies right now might still be sneaking these into contracts, thinking, ‘Hey, these workers are unlikely to actually know what their legal rights are,’” Khan said. “All of that would be precluded by the fact that firms would actively have to inform the employees and give them clear notice.”