The Federal Trade Commission on Thursday proposed a new rule to prohibit the use of non-compete clauses in worker contracts, a change that would significantly increase the bargaining power of employees.
The proposal builds on the FTC’s finding that non-compete clauses violate its fair trading laws, and the agency called them a «pervasive and often exploitative practice that suppresses wages, stifles innovation, and locks out entrepreneurs.» so they don’t start new businesses.»
The FTC estimates that the new rule could increase wages by about $300 billion a year.
“The freedom to change jobs is fundamental to economic freedom and to a prosperous and competitive economy,” FTC Chairman Lina M. Khan said in a statement. “Those who don’t compete prevent workers from freely changing jobs, depriving them of higher wages and better working conditions, and depriving companies of a talent pool they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.»
Non-compete clauses, legal stipulations that prevent workers from going to work or starting a competing business within a certain period of time after leaving a job, are used in a variety of industries and job levels. Their use has grown in recent years, and many economists believe they are a major contributing factor to stagnant wages.
The FTC said that 1 in 5 workers are subject to non-compete clauses.
according to a 2019 study by the left-wing Economic Policy Institutebetween a quarter and about half of all workers are subject to non-compete clauses.
President Joe Biden applauded the move. “These agreements prevent millions of retail workers, construction workers and other workers from getting a better job, getting better pay and benefits, in the same field,” he told reporters on Thursday.
Advocates of non-competitors see them as an incentive for companies, particularly those engaged in higher-skill jobs, to invest in employees with the comfort that those expenses will bring. They are also a way for companies to protect high-level sensitive information from being given to competitors.
But some studies have shown that the widespread use of non-competition may be hurting workers’ wages by restricting their mobility and potentially limiting the competition that drives the economy.
“First, non-competition reduces the wages of lower-paid workers,” a study by the Federal Reserve Bank of Minneapolis noted. “Second, low-wage workers have less access to legal advice than other workers, making it difficult for them to engage in fair and informed negotiation with employers about their non-compete contracts.”
Non-compete clauses have been reported in companies such as Jimmy John’s sandwich chainthat prevented workers from working at any company within three miles of a company store that made more than 10 percent of its income from sandwich sales for two years, and Amazon, which even required some temporary warehouse workers will sign non-compete pacts according to a 2015 The Verge report. Some summer camps I have used them too companies have even used them during internships.
Jimmy John’s, which did not immediately respond to NBC News’ request for comment, agreed to abandon the practice in 2016 under legal pressure from multiple state attorneys general. Amazon also did not immediately respond to a request for comment.
A study of more than 11,000 workers found that a third of them learned about their non-compete clauses only after accepting their job offers, limiting their bargaining power on the issue. He 2015 study published in the Journal of Law and Economics also found that only 10 percent of employees negotiated on the clause. Most assumed she was non-negotiable or likely to cause problems with her employer.
Kenneth Dau-Schmidt, an employment law expert at Indiana University, said non-compete clauses made sense when used primarily for employees in higher-level roles — CEOs and other executives, research scientists, and senior engineers. ), but that its wider use required action.
“They have been taken to ridiculous extremes and are starting to have a negative effect on our economy as a result. Our job markets are less competitive than they used to be,” he said.
Dau-Schmidt expected the FTC’s proposal to draw criticism from the business community and said it could likely end up being more targeted.
The agency voted 3-1 on the rule, with Christine Wilson, a Trump appointee, voting against it. Wilson said she believed the rule was outside the FTC’s purview and would be vulnerable to legal challenges.
“The proposed No-Compete Rule represents a radical departure from hundreds of years of legal precedent that employs a fact-specific investigation of whether a non-compete clause is unreasonable in length and scope, given the business justification for the restriction.” , said. he said she in a statement.
The FTC will open a 60-day comment period on the proposed rule before finalizing it later this year.
Ted Sichelman, a University of San Diego law professor who has written favorably on non-compete clauses, said he believed the FTC’s proposal went too far. Sichelman co-authored a leading analysis of critical studies of noncompetesand says many are based on misinterpretations of state law.
“For many companies, particularly those that rely on trade secrets, non-compete is very important,” he said.
He said he would potentially support a rule that would seek to eliminate non-competition for low-wage jobs.
The Chamber of Commerce criticized the FTC’s proposal and said it believed it would not hold up in court.
«Today’s actions by the Federal Trade Commission to completely ban non-compete clauses in all employer contracts are flagrantly illegal,» Senior Vice President Sean Heather said in a statement. “Attempting to prohibit non-compete clauses in all employment circumstances overturns well-established state laws that have long governed their use and ignores the fact that, when used appropriately, non-compete agreements are an important tool for encourage innovation and preserve competition”.
At least 10 states prohibit the use of no-compete offers for low-wage workers by reducing their wages. A 2021 study found that a ban in Oregon against clauses of lower-paid workers helped wages rise 2 to 3 percent.