- The FTC wants to ban noncompete agreements, which stop workers from moving to competitors or starting their own similar businesses.
- Under the FTC's proposed rule, employers wouldn't be able to impose a noncompete, and past ones would be rescinded.
The Federal Trade Commission wants to make sure your boss can't force you to sign away your rights to work at a similar company — or even start your own business.
Under a new proposed rule, the FTC would ban employers from saddling workers with noncompete agreements that prohibit them from working at competitors, or starting similar businesses. The Commission argues that noncompetes are an unfair method of competition, violating the Federal Trade Commission Act — and their ban would broaden opportunities for American workers, putting almost $300 billion more in their pockets annually.
"Why are we doing this? Basically, in short, there's a whole raft of economic evidence that now documents the ways in which these noncompete clauses undermine competition and competitive conditions," FTC chair Lina Khan said.
Theoretically, noncompetes are meant to stop primarily high-level employees from jumping ship to other companies, bringing proprietary information and other knowledge with them.
But, in practice, noncompetes are more sweeping. Over 30 million workers are made to sign noncompetes, according to the National Employment Law Project, and over a third of those workers are asked to sign the agreements after they've already accepted a job. In some cases, workers can't start their own businesses similar to the ones they're working in.
"If you're a phlebotomist or a journalist and you think that you can't practice your trade in the area in which you work for a long period of time, that's still significantly chilling. It could still mean that you don't match with the optimal job that you want," Elizabeth Wilkins, director of the office of policy planning at the FTC, said. "You can't get a raise, and you can't ask for the kinds of things that you might be able to ask for if you could get a better job."
Agreements are sometimes foisted upon low-wage workers, preventing them from jumping ship to a different restaurant or retail store offering higher pay. Among workplaces paying an average of less than $13 an hour, 29% have noncompetes for all workers, according to a report from the left-leaning Economic Policy Institute.
One famous example of noncompetes: Stopping sandwich sales. In Illinois, sandwich chain Jimmy John's settled a lawsuit from the state's attorney general in 2016, and said it would not enforce noncompetes on its workers. Workers had been banned from working at any business within two or three miles of a Jimmy John's that made over 10% of its revenue from selling "submarine, hero-type, deli-style, pita, and/or wrapped or rolled sandwiches" for two years.
The White House has already taken aim at noncompetes as a barrier to competition. President Joe Biden signed an executive order last summer encouraging the FTC to ban or limit the agreements. Now, the FTC is doing just that, with its proposed rule outlawing employers from entering into, maintaining, or making it seem as though a worker is subject to a noncompete. Independent contractors and unpaid workers would be subject to the rule. Under it, employers would have to rescind current noncompetes and let workers know they're doing so.
The public will have 60 days to submit comments on the proposed rule, which the FTC will then review and potentially incorporate into a final rule.
Anecdotally, some businesses have recently been more dogged in enforcing noncompetes amidst labor shortages in attempt to keep workers. The rule is likely to attract ire from businesses which deploy noncompetes.
Crucially, noncompetes are one mechanism for maintaining what's called monopsony power — which means that, due to a lack of competition, employers have more power over the labor market, and the ability to do things like set wages at lower levels than a more competitive market would create.
The Treasury Department previously found that wages are 15% to 20% lower currently than they would be in a perfectly competitive labor market, showcasing the monopsony power employers still hold. One reason for those suppressed wages, according to Treasury: Noncompetes.
"If this rule were to be finalized and go into effect, workers that are currently stuck in place, effectively, would now be able to freely move to another job," Khan said, adding: "I would think that would basically force employers to compete more vigorously over workers in ways that should lead to higher wages. That should lead to improved working conditions."