The agency said FTC The rule imposed by the company when employees left was unfair to workers . And competitors, estimating that the change could raise U.S. wages by nearly $300 billion.
The FTC said the proposed ban is anti-competitive
The Federal Trade Commission on Thursday proposed a new rule to ban. 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 noncompete clauses violate its fair trade laws. With the agency calling them “widespread and often exploitative practices. That suppress wages, stifle innovation, and prevent entrepreneurs from starting new businesses.”
The FTC estimates that the new rules could raise wages by about $300 billion a year.
“Freedom to change jobs is the key to economic freedom and a competitive, prosperous economy,” FTC Chairwoman Lina M. Khan said in a statement. “Non-competition prevents workers from freely changing jobs, deprives. Them of higher wages and better working conditions, and deprives businesses of a talent pool. That they need to build and expand. By ending . This practice, the FTC’s proposed rule . Will promote greater dynamism, innovation and healthy competition.”
Non-compete clauses – legal terms that prevent workers from starting or going to work in a competing business for a certain period of time. After leaving a job – are used in a variety of industries and job levels. Their use has increased in recent years, and many economists believe they are an important factor in wage stagnation.
The FTC says 1 in 5 workers are bound by non-compete clauses.
According to a 2019 study by the left-leaning Economic Policy Institute. Anywhere from a quarter to nearly half of workers are subject to non-compete clauses.
President Joe Biden welcomed the move. “These contracts prevent millions of retail workers, construction workers. And other working people from getting a good job. Good pay and benefits in the same fields,” he told reporters Thursday.
Advocates of non-competes see . Them as an incentive for companies, particularly those engaged in highly skilled work. To invest in workers to cover these costs. They are a way for companies to protect high-level. Confidential information from being leaked to competitors.
But some studies have shown. That the increased use of non-competes can hurt workers’ wages by limiting . Their mobility and limiting the potential competition that strengthens the economy.
“First, non-competition lowers wages for low-wage workers,” noted a study by. The Minneapolis Federal Reserve Bank. “Second, low-wage workers have less access to legal counsel than other workers. Imaking it more difficult for them to enter into a fair. informed discussion with employers about. Their non-compete agreements.”
Non-compete clauses have been reported at companies including. Sandwich chain Jimmy John’s, which barred employees from working at any company , within three miles of a company store. That earned more than 10% of its revenue from sandwich sales for two years, and Amazon. Which required Even some temporary. Warehouse workers to sign non-competes, according to a report by The Verge from 2015. Some summer camps also use them, and companies even hire them during internships.
Jimmy John’s. Which did not immediately respond to request for comment, agreed to drop. The practice in 2016 under legal pressure from many state attorneys general. Amazon also did not immediately respond to a request for comment.
The non-rival clause will strengthen the hands of the workers
A survey of more than 11,000 workers found. That a third of them learned about their non-compete clause only . After accepting their job offer – limiting their bargaining power over the issue. A 2015 study published in the Journal of Law and Economics found that 10% of employees discussed the clause. Most assumed it was either non-negotiable or would cause problems with their employer.
Indiana University employment law expert Kenneth Dow-Schmidt says non-compete clauses make sense. When they’re used for workers in high-level jobs — CEOs and other executives. Research scientists and high-level engineers — but their widespread use is essential work.
“They’ve been taken to ridiculous extremes. And as a result they’re starting to have a negative impact on our economy. Our labor market is less competitive than it used to be,” he said.
Dau-Schmidt expected the FTC’s proposal to draw pushback from the business community. And said it would likely be more targeted.
The agency voted 3-to-1, with Christine Wilson, a Trump-appointee, voting against. Wilson said he believed the rule was outside. The FTC scope and would be vulnerable to legal challenges.
“The proposed non-compete clause rule represents a radical. Beparture from hundreds of years of legal precedent. That employs a fact-specific inquiry into. Whether a non-compete clause is unreasonable in duration and scope. Because of the business rationale for the restriction. He said in a statement. .
The FTC will open a 60-day comment period for the proposed rule before finalizing it later this year.
Ted a law professor at the University of San Diego . Who has written in favor of noncompete clauses. Said he believes the FTC’s proposal goes too far. co-authored a prominent analysis of studies critical of non-competes. And says many are based on flawed understandings of state laws.
“For many companies, especially those. That rely on trade secrets, non-compete is very important,” he said.
He said he would support a rule that sought to drop non-competition for low-wage jobs.
The Chamber of Commerce condemned the FTC proposal and said it believed it would not hold up in court.
“Today’s action by. The Federal Trade Commission to completely ban non-compete clauses in . All employer contracts is illegal,” Senior Vice President Sean. Heather said in a statement. “Efforts to ban non-competition clauses in all employment situations overturn well-established . State laws that have long regulated their use and ignore. The fact that. When used appropriately, non-competition agreements are an important tool to encourage . Innovation and preserve competition. .”
At least 10 states prohibit the use of non-compete offers for low-wage workers to reduce their pay. A 2021 study found that Oregon’s ban on clauses for low-wage workers helped raise wages by 2% to 3%.