By Sam Becker
If you’ve ever felt trapped or otherwise burned by an employer’s noncompete clause, now is your chance to let the government know.
The Federal Trade Commission (FTC) is proposing a new rule that would effectively ban employers from utilizing noncompete clauses, which, the FTC estimates, would increase wages for American workers by as much as $296 billion annually. The proposed rule would make it illegal for employers to enter into or maintain noncompete contracts with workers.
Noncompete clauses (or simply “noncompetes,” as they’re often called) generally prohibit workers from starting their own businesses to directly compete with an employer’s company, or going to work for a competitor for a specific period of time or within a certain geographic region. While some employers use noncompetes to protect trade secrets or intellectual property, they have been adopted by many employers as a method to prevent workers from finding and accepting other jobs in their industry or starting their own companies.
The FTC says that as many as 30 million American workers are affected by noncompetes, and as such, they are a drag on the overall economy by decreasing competition for employees and stifling would-be entrepreneurs. Earlier this year, the Treasury Department published a report showing that noncompetes, along with other anticompetitive measures utilized by U.S. employers, have decreased wages for workers by 20%.
“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,” said Lina M. Khan, chair of the FTC, in a statement. “By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
The public will be able to submit comments regarding the proposed rule for 60 days, which will then be reviewed before the rule is made final. It would take effect 180 days after it’s published.
The FTC’s action comes a day after Khan announced that the agency was taking action against three companies for using noncompetes on their workers. One of those companies, Prudential Security, “used noncompetes to prevent security guards it hired from leaving to work for a rival within 100 miles for 2 years after departing,” Khan tweeted on Wednesday. “Many guards earned near minimum wage. Prudential subjected them to a $100K penalty for violating the noncompete,” she continued, which the company “repeatedly enforced.”
It’s situations such as this that have spurred the FTC to action, as there doesn’t seem to be any justifiable reason for a security guard earning low wages to be subject to a noncompete agreement, other than to prevent their employer from potentially facing higher turnover costs.
The FTC’s proposal is likely to generate significant pushback from the business community, although in some states the use of noncompetes is already banned and restricted to various degrees. For workers, the passage of the rule could lead to higher wages. For instance, Oregon banned noncompetes for hourly workers in 2008, which led to an increase in hourly wages of between 2% and 3% on average, according to past research.
While noncompetes are much more common among high-paying jobs in specific industries, economists do consider them to be something of an economic anchor, suppressing wage growth and entrepreneurship. Accordingly, if the FTC is successful in publishing its proposed rule, it could open up new opportunities for millions of workers. “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said Khan, in the FTC’s statement.
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