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FTC Unveils New Rule Banning Companies From Using Noncompete Clauses

The agency estimates that the rule will raise wages by a collective $300 billion annually.

FTC Commissioner nominee Lina M. Khan testifies during a Senate Commerce, Science, and Transportation Committee nomination hearing on April 21, 2021, in Washington, D.C.

The Federal Trade Commission (FTC) announced on Thursday that it has proposed a sweeping new rule that would bar employers from imposing noncompete clauses on workers, a move that could have major benefits for tens millions of workers across the U.S.

The FTC said that employers’ use of noncompete clauses, which typically prohibit workers from moving jobs to competitors within certain time frames, is “​​a widespread and often exploitative practice.” Such clauses hamper worker choice within the job market, suppresses workers’ wages and discourages competition and innovation, the agency said.

The proposal comes after antitrust regulators found on a preliminary basis that noncompete clauses are in violation of Section 5 of the Federal Trade Commission Act, which prohibits “unfair or deceptive acts or practice” that could impede competition and under which the FTC is increasingly attempting to flex its regulatory power. The rule would prohibit employers from attempting to enter into a noncompete with workers and require employers to rescind current noncompete clauses.

If enacted, the rule would give 30 million workers more career opportunities and could raise wages by a collective $300 billion annually, according to the agency. This would represent a major win for workers in a job market that is largely stacked against them, as Treasury Department analysts have found, and give some power back to workers in their ability to bargain with employers and choose their career paths.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC Chair Lina Khan in a statement. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

Khan added in a call with reporters on Wednesday, per The Washington Post, that noncompetes essentially “loc[k] up workers” and that the new rule “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 FTC voted three to one to publish the proposed rule, with the lone “no” vote coming from the sole Republican on the board. The FTC is now seeking public comment on the proposal.

“Research shows that employers’ use of noncompetes to restrict workers’ mobility significantly suppresses workers’ wages — even for those not subject to noncompetes, or subject to noncompetes that are unenforceable under state law,” said Elizabeth Wilkins, FTC Director of the Office of Policy Planning. “The proposed rule would ensure that employers can’t exploit their outsized bargaining power to limit workers’ opportunities and stifle competition.”

Indeed, surveys have found that between 18 percent and 47 percent of workers are bound to noncompete clauses, representing a wide variety of industries, with the Economic Policy Institute finding in 2019 that roughly half of responding businesses use noncompete clauses. Wages are lower in states that allow enforcement of noncompetes, research finds — and, even in states where it is illegal to enforce noncompete clauses like California, employers still use them to pressure workers who may not be aware of the law.

Eliminating the use of noncompetes could have the immediate effect of increasing wages. In Hawaii, for instance, one study found that wages for tech workers rose by 4 percent after the state banned the use of noncompetes; another study of Oregon, which mandated in 2008 that new noncompetes become unenforceable, found that hourly workers’ wages rose by 2 to 3 percent after the new rule went into place.

Even though noncompete clauses have such broad impacts on individual workers and industries at large, workers often view noncompetes as relatively inconsequential, and would rather sign one than negotiate over terms with employers. Employers will also often shuffle noncompete clauses in with long contracts or other paperwork, making them harder for workers to detect before signing them.

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