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FTC Moves to Ban Noncompete Clauses

S.J. Steinhardt
Published Date:
Jan 6, 2023

The Federal Trade Commission (FTC) has proposed a rule to ban employers from imposing noncompete clauses on employees, calling their use “a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.”

Such agreements prevent workers from leaving to work for a competitor or starting a competing business for a period of time after employment. They have been used in a number of different occupations and industries, from hairstylists and warehouse workers to doctors and business executives.

In its overview of the proposed rule, the FTC estimated that the proposed rule, which is based on a preliminary finding that noncompetes are an unfair method of competition, could increase wages by between $250 billion and $296 billion per year." The agency also estimates that the rule could "expand career opportunities for about 30 million Americans.” In addition to preventing employers from entering into noncompete clauses with workers, the proposed rule would also require employers to rescind existing noncompete clauses.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC Chair Lina M. Khan. “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.”

Noncompetes appear to affect roughly 20 percent to 45 percent of U.S. workers in the private sector, and they suppress pay because job switching is a way of increasing income, the New York Times reported, citing several studies. Noncompetes reduce competition within industries by protecting established companies from start-ups, and they may also harm productivity by preventing the hiring of suitable workers, other studies cited by the Times showed.

“Research shows that employers’ use of noncompetes to restrict workers’ mobility significantly suppresses workers’ wages—even for those not subject to noncompetes, or subject to noncompetes that are unenforceable under state law," said Elizabeth Wilkins, director of the FTC’s Office of Policy Planning. “The proposed rule would ensure that employers can’t exploit their outsized bargaining power to limit workers’ opportunities and stifle competition.”

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