The Federal Trade Commission is proposing a new rule that would prevent employers from imposing non-competition clauses on workers. These types of arrangements, long criticized by progressives and some free marketers, typically prevent workers from joining a competitor for a period of time after leaving the company.
President Biden hailed the proposed rule, calling it a “huge step forward.” The FTC’s decision follows a Executive Decree it signed in 2021 targeting anticompetitive practices in technology, healthcare and other sectors of the economy. The order included a call for a ban or limit non-competition agreements to help raise wages.
“The freedom to change jobs is essential to economic freedom and a competitive and prosperous economy,” FTC Chairman Lina Khan said in a statement. statement. “Non-competition prevents workers from freely changing jobs, depriving them of higher wages and better working conditions, and depriving companies of a pool of talent they need to build and grow.”
The proposed rule would make it illegal for an employer to enter into or attempt to enter into a non-compete clause with a worker, or to tell a worker, in certain circumstances, that they are the subject of a non-competition clause. competition. The rule also invalidates existing non-compete agreements.
“This is a blockbuster development in the employment world,” said Peter Rahbar, a New York labor attorney who has represented employers as well as workers.
Dislike, but common
Non-competition agreements have become increasingly common in the workplace. An estimate by the left-leaning Economic Policy Institute found that a third of companies require all their employees to sign non-compete clauses, including many hourly workers in low-paying jobs like cleaning, catering and security.
States have begun to regulate non-compete agreements by limiting what workers can sign them or requiring companies to pay more to request a non-compete agreement, and studies have shown that states that limit these restrictive agreements see the wages of the workers then increase.
Progressives in Congress hailed the proposed rule, calling it a “major move for working people.”
The proposed rule comes a day after the FTC settled with three companies that forced their workers to sign non-compete clauses, including a Michigan-based security company that threatened minimum wage guards with a $100,000 penalty if they took a job with a competitor.
The FTC estimates the new rule could raise wages by nearly $300 billion a year and expand career opportunities for about 30 million Americans.
Still, the rule is likely to be challenged in court, with the U.S. Chamber of Commerce calling it “manifestly illegal.”
“The scope of this non-competition excess on the part of the FTC — legally and in terms of public policy — is hard to overstate,” said House policy officer Neil Bradley. said on Twitter.
The FTC’s proposal is based on a preliminary finding that non-competition clauses nullify competition in violation of Section 5 of the Federal Trade Commission Act. Article 5 prohibits methods of unfair competition.
It would apply to independent contractors and anyone working for a business, whether paid or unpaid. It would also require employers to rescind existing non-competition clauses and actively notify workers that they are no longer in effect.
The proposed rule would generally not apply to other types of employment restrictions, such as nondisclosure agreements, but other types of employment restrictions could be subject to the rule if they are so broad that they function as non-competition clauses. Nor would it apply to agreements between companies and their franchisees.
Protect your investment
Employers who use non-competition say they are necessary to protect trade secrets or other confidential information that employees might discover in the course of their work.
“Employers will say these restrictions are necessary to foster innovation because we’re constantly losing employees and they take information with them, so we can’t innovate,” Rahbar said. He noted that even if the FTC ban goes into effect, employers will have other tools, such as confidentiality agreements, that limit the information workers could potentially get from the company.
“It will, and should, cause some soul-searching on the part of employers about how to protect what they care about,” he said. “With employees, that means paying them more, treating them better, and thinking about how to entice someone to stay with you instead of forbidding them to leave. Employers will have to work harder to keep their employees.”
With Associated Press reporting.
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