The Federal Trade Commission (FTC) proposed a rule on Thursday, Jan. 12, that would block employers from forcing employees to sign non-compete agreements.
Non-compete agreements are clauses in employment contracts that prevent workers from working for a competitor or starting a business in the same industry for a certain period of time after leaving a job.
The FTC claims that non-compete clauses in work contracts violate Section 5 of the Federal Trade Commission Act, which prohibits "unfair methods of competition in or affecting commerce." The FTC further claimed that this "widespread and often exploitative practice" is responsible for suppressing wages, hampering innovation and blocking entrepreneurs from starting new businesses in fields they are familiar with. (Related: Number of Americans with a second job up by 6% as inflation continues to eclipse wage gains.)
The FTC estimates that as many as 30 million American workers – or around one in five American workers – are held under non-compete agreements. According to the agency, preventing most employers from forcing workers to sign these agreements could increase wages by nearly $300 billion per year. Some of this value represents income transfers from firms to workers, and from consumers to workers if firms raise prices because they need to increase wages to retain workers.
"The freedom to change jobs is core to economic liberty and to a competitive, thriving economy," said FTC Chairwoman Lina M. Khan in a statement. "Non-competes 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."
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"Non-competes are basically locking up workers, which means they are not able to match with the best jobs," said Khan. "This is bad for competition. It is bad for business dynamism. It is bad for innovation."
If this rule against non-compete agreements does become official, companies would have to rescind active non-compete requirements imposed upon workers and inform employees about this change. Contractors and non-full-time workers would also be protected if their employers try to strong-arm them into these kinds of agreements.
Rule against non-compete agreements may lead to "great resignation"
The four-member FTC already voted three to one last month to issue this proposal and it is currently subject to a 60-day period of public comment before it can be adopted as a regulation. Only Commissioner Christine Wilson, appointed by former President Donald Trump, voted against the proposal. She wrote in her dissent that the FTC has gathered only scant evidence to support a complete ban on non-compete agreements.
The U.S. Chamber of Commerce is already weighing taking the FTC to court if this proposal is adopted. "We don't believe they have the statutory authority," said Sean Heather, the chamber's senior vice president for international regulatory affairs and antitrust issues. "They know they are on very tenuous ground."
Advocates of non-compete agreements like the Chamber of Commerce noted that these agreements act as incentives for companies to invest in their employees and an essential way for them to protect high-level, confidential information from being brought to competitors.
Vanessa Matsis-McCready, associate general counsel and director of human resources for human resources firm Engage PEO, warned that the FTC's timing of making this proposal official could worsen an already exceptionally competitive job market.
"There is a potential that it will contribute to the 'great resignation' that everyone is talking about to some degree," she said. But she added that employers could rely on other "tools in their toolbox" for retaining skilled employees, such as by offering higher wages and better benefits.
Despite this, the FTC is likely to push through with this proposal, barring any legal defeats. President Joe Biden himself has hailed the commission's move. "These agreements block millions of retail workers, construction workers and other working folks from taking a better job, getting better pay and benefits, in the same field," he said.
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