The FTC estimates that banning non-compete contracts would open up new job opportunities for 30 million Americans and raise wages by $300 billion a year. If passed, the rule could send shockwaves across a wide range of industries.
A widely cited survey of economists from 2014 found that nearly 20% of workers in the United States are bound by non-competition clauses in a variety of jobs, from hairdressers to software engineers to nurses. These contracts have forced workers into debt during long job searches, excluding them from their own profession or channeling them into lower-paying sectors.
The proposed rule, recommended by President Biden as part of a decree 2021Is the FTC’s First Big Move to Push the Boundaries of Antitrust Enforcement to Empower Americans workers.
FTC Chair Lina Khan, a Biden appointee who has vowed to “use every tool in our toolbox” to curb anti-competitive corporate behavior, said the rule was being proposed because of ” a series of economic evidence” which now shows “the ways in which non-competition clauses undermine competition.
“Non-competitions basically lock workers in, which means they’re not able to offer them the best jobs,” Khan said in a call with reporters Wednesday afternoon. If this rule were to be finalized and come into effect… [it] would force employers to compete more vigorously with workers in a way that should lead to higher wages and better working conditions, essentially injecting competition into the labor market.
The proposed rule is based on an early finding that non-competition clauses violate Section 5 of the Federal Trade Commission Act, which prohibits “unfair” methods of competition. The FTC is solicit public comment on the proposed rule for 30 days, but he did not disclose a timeline for his approval.
Under its current Democratic majority, the FTC voted 3 to 1 to issue a notice on the proposed rule, the first step in its rulemaking process.
The prospect of banning non-competition agreements has met with some backlash from the business community. The American Chamber of Commerce wrote in a letter to the FTC in 2021 that the agency “does not have the legal authority” to enforce such a rule which “would harm consumers by prohibiting the many pro-competitive aspects of non-competition”.
A record 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 influence to leave and change jobs, especially in low-wage industries, such as hospitality. But workers covered by non-competition clauses haven’t had the same power because the labor market in those jobs has been artificially restricted.
A growing body of research shows that contracts are incompetent cut wages and mobility for workers various industries by ensuring that employers do not have to compete for workers by raising wages or improving working conditions.
The use of non-competition clauses dates back hundreds of years. These restrictions were originally intended to protect a company’s trade secrets, but have become particularly common in employment contracts in recent years – for low-wage, white-collar and executive workers – allowing companies to benefit from less competition at all levels.
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 rule if the agency determines that they prevent workers to change jobs. It would extend beyond employees to independent contractors and unpaid workers, such as unpaid interns.
A few states have already banned non-competition 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 those states with bans have seen bigger salary increases and more Professional mobility than when the non-competition clauses were legal. Some observers suggest that the rise of California’s Silicon Valley as a global hub for tech innovation has been fostered by the state’s reluctance to enforce non-competition contracts.
Yet many employers continue to ask workers to sign non-compete contracts in states where the practice has been banned, in part because low-wage workers are still unaware of their rights. A challenge going forward could be enforcing these rules as the FTC grapples with its own limited resources.
Khan said she was confident in the agency’s ability to compel companies to follow the rule if enacted.
“Right now, companies could still put them into contracts thinking, ‘Hey, it’s unlikely these workers actually know what their legal rights are,'” Khan said. “All of this would be precluded by the fact that companies would have to actively inform employees and give them clear notice.”
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