Antitrust regulators propose banning noncompete clauses for workers

On Jan 5, 2023

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The Federal Trade Commission proposed a rule Thursday to prohibit employers from imposing noncompete clauses on workers — a widespread practice that economists say suppresses pay, prevents new companies from forming and raises consumer prices.

The ban would make it illegal for companies to enter into noncompete contracts with employees or continue to maintain such contracts if they already exist, and it would require that companies with active noncompete clauses inform workers that they are void. Such agreements typically prevent workers from getting jobs at a competitor of a current or former employer for a defined period.

The FTC estimates that banning noncompete contracts would open new job opportunities for 30 million Americans and raise wages by $300 billion a year. If enacted, the rule could send shock waves across a wide range of industries.

One widely cited survey of economists from 2014 found that close to 20 percent of workers in the United States are bound to noncompete clauses across a variety of jobs, from hairstylists to software engineers to nurses. These contracts have forced workers to take on loads of debt during lengthy job searches, locked workers out of their own professions or shunted them into lower-paying industries.

The proposed rule, recommended by President Biden as part of a 2021 executive order, is the FTC’s first big shot at stretching the boundaries of antitrust enforcement to empower American workers.

FTC Chair Lina Khan, a Biden appointee who has promised to “use all of the tools in our toolbox” to rein in anticompetitive behavior from companies, said the rule is being proposed because of “a raft of economic evidence” that now shows “the ways that noncompete clauses undermine competition.”

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“Noncompetes are basically locking up workers, which means that they’re not able to match with the best jobs for them,” Khan said on a call with reporters Wednesday afternoon. “If this rule were to be finalized and go into effect … [it] 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 proposed rule is based on an initial finding that noncompete clauses violate Section 5 of the Federal Trade Commission Act, which prohibits “unfair” methods of competition. The FTC is seeking public comment on the proposed rule for 30 days, but it has not disclosed a timeline for its approval.

Under its current Democratic majority, the FTC voted 3-1 to publish a notice about the proposed rule, the first step in its rulemaking process.

The prospect of banning noncompete agreements has been met with some backlash from the business community. The U.S. Chamber of Commerce wrote in a letter to the FTC in 2021 that the agency “lacks legal authority” to enforce such a rule that “would harm…