While embraced by company owners, critics say noncompetes suppress wages, hamper innovation, and block entrepreneurs from starting new businesses. By stopping the practice, the FTC estimates that it could not only put more money into workers’ pockets but also expand career opportunities.
“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,” FTC Chair Lina Khan said. “By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
Under the proposed rule, the FTC would bar employers from requiring workers to sign new noncompete agreements. And it would require they rescind existing noncompetes within six months of the new rule’s adoption. Employers would also need to give notice to the worker that the noncompete clause is no longer in effect and will not be enforced. That includes to workers who have already exited the company but are still limited by the agreement’s terms.
The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid.
The Commission voted 3-1 to launch the rulemaking proceeding.
A growing number of states have taken steps to block the enforcement of noncompete agreements in recent years. Utah was the most recent. Yet according to the White House, roughly half of private-sector businesses require at least some employees to enter non-compete agreements. A 2021 study by Rothstein and Starr found 18% of workers were under a noncompete agreement.
“This suggests that employers maintain noncompete clauses even where they likely cannot enforce them,” the FTC says.
A study released by the U.S. Department of Treasury in 2016 concluded such agreements reduce wages by an average of 1.4% with the impact worse among older workers.
“These cases highlight how noncompetes can block workers from securing higher wages and prevent businesses from being able to compete,” Khan said.
On the Net:
FTC non-compete press release
