Employers would be banned from making staff sign noncompete clauses, according to proposed rules that federal regulators say would boost worker pay and end a major drag on people who wish to change jobs, and stay in the same industry.
The Federal Trade Commission released the proposed rules on Thursday designed to end worker noncompete clauses, which typically prevent the person signing it from leaving their job in order to start a rival business, or simply take a job with a competitor.
In theory, the clauses are supposed to protect businesses from former employees poaching clients, among other nefarious sales tactics. But the overly restrictive clauses are popping up in all kinds of work in for high- and low-paying jobs, ranging from warehouse workers and hairstylists to doctors and business executives, the FTC said.
Approximately 30 million workers are restricted by noncompete agreements, the FTC said. Doing away with the clauses would boost worker earnings between $250 billion and $296 billion annually and would narrow the pay gaps between men and women, as well as the pay gap between whites and minority workers.
In 2019, one estimate from researchers at Cornell University and the Economic Policy Institute, a left-leaning think tank, said between one-quarter and nearly half of all private-sector workers had signed a noncompete agreement.
“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,” Lina Khan, the FTC’s chair, said in a statement.
The proposed rules would prevent employers from acting upon existing clauses or telling staff they are subject to noncompete agreements.
“‘The FTC’s action today is thrilling.’”
They also come at a time when the job market remains tight and more laws are going on the books making it easier to understand a job’s potential pay.
“The FTC’s action today is thrilling,” said Matt Kent, competition policy advocate at Public Citizen, a consumer-advocacy organization. “If finalized in this form, the rule would be wide ranging, applying to independent contractors and requiring an employer to actively inform workers that existing noncompete clauses are no longer in effect.”
Kent said the rule was based on the regulator’s authority to combat unfair competition. But it’s also coming at a time when the conservative-leaning Supreme Court is taking a dim view on how far regulators can go.
The FTC proposal “is blatantly unlawful,” said Sean Heather, the U.S. Chamber of Commerce’s senior vice president for International Regulatory Affairs and Antitrust. “Since the agency’s creation over 100 years ago, Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule. The Chamber is confident that this unlawful action will not stand,” Heather said.
A blanket ban on noncompete agreements would fly against state laws that govern their use, he said. The ban “ignores the fact that, when appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition.”
“We believe that both things are true, that noncompetes can be inappropriate and abusive, but can also in other circumstance be appropriate and necessary. It makes little sense to have a blanket ban. In the past the states have drawn these lines, we question the need for a federal rule,” Heather said.
Various state rules on non-compete clauses already exist. In California, North Dakota and Oklahoma, the clauses are null and void for nearly all workers, according to the FTC. Elsewhere, state laws kick in to some degree. For example, 11 states and Washington D.C. say the clauses can’t be used for workers below certain pay levels.
A day earlier, the FTC announced three cases against companies using non-compete clauses — one related to security-guard services and another related to the manufacturing of glass containers. Affected workers ranged from low-wage security guards to engineers, the FTC said, adding that it was the first time the regulator sued to stop the clauses being used.
Now it’s question of what’s next for the overarching rule proposal. The FTC wants public comment on the proposed rules.
“Noncompetes suppress wages. Removing them is very good for workers,” said Heidi Shierholz, president of the Economic Policy Institute.
“It is not going to reverse four decades of decisions that wrested power from workers, but there are many, many, many levers that have been pulled to sort of shift power from workers to employers, and this is one of them. There is still a lot of work to do, but this is an incredibly important step.”
But the idea is already getting panned by one of the regulator’s own commissioners.
Commissioner Christine Wilson, appointed during the Trump administration, dissented from the rule proposal.
The widespread ban would be a “radical departure” from fact-specific questions about whether a non-compete went too far. Besides, there can be valid reasons for such clauses, like the protection of trade secrets and confidential commercial information, she noted — justifications getting short shrift in the current proposal, she added.
Later Thursday, President Joe Biden saw it differently. He called the proposed rules “a huge step forward in banning noncompete agreements that are designed simply to lower people’s wages,” he said, according to a pool report.
Emma Ockerman contributed to this report