Progressive advocacy groups and lawmakers celebrated Thursday after the Federal Trade Commission proposed a new rule that, if finalized, would prohibit employers from including noncompete clauses in employment contracts, which the agency described as “a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.”
Given the prevalence of noncompete agreements, which prevent roughly one in five U.S. workers from freely changing jobs, the FTC estimates that “the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.”
The American Economic Liberties Project (AELP) called the FTC’s 3-1 vote to initiate a rulemaking process to ban the use of noncompete clauses “a victory for American workers and fair, competitive markets.”
“Millions of workers, future new business owners, everyday consumers, and the American economy overall will be better off because of the FTC’s vote today,” AELP executive director Sarah Miller said in a statement. “For too long, coercive noncompete agreements have unfairly denied millions of working people the freedom to change jobs, negotiate for better pay, and start new businesses.”
Sen. Elizabeth Warren (D-Mass.) noted that “noncompete clauses give companies unfair power over workers” and commended the FTC for moving to ban them.
Noncompete clauses give companies unfair power over workers, enabling them to cut wages and benefits without fear of workers finding a new job or starting their own business.
— Elizabeth Warren (@SenWarren) January 5, 2023
I’ve called for a ban on these harmful contracts and commend @FTC's action to protect workers. https://t.co/oJGSdk87Y8
Miller, meanwhile, said that Thursday’s proposed rule “makes clear that the use of noncompetes to undermine fair competition for workers and prevent new businesses from entering the market is also an illegal practice under the antitrust laws.”
“Yesterday’s enforcement actions under Section 5 of the FTC Act make clear the FTC means business,” she added, referring to the lawsuit the FTC—led by “antitrust trailblazer” Lina Khan—filed Wednesday to force three corporations and two individuals to lift noncompete restrictions they imposed on thousands of workers.
Wednesday’s crackdown—which marked the first time the FTC has sued to halt unlawful noncompete clauses—came just weeks after the agency voted 3-1 to issue a new policy statement restoring its commitment to “rigorously enforcing” the long-neglected Section 5 ban on “unfair methods of competition.”
“This rule would be an important step in creating an economy that works for everyone.”
Thursday’s proposal to prohibit noncompete agreements altogether comes less than three weeks after AELP, Demand Progress, Public Citizen, the Economic Policy Institute (EPI), and more than 20 other groups urged the FTC to immediately begin a rulemaking process to eliminate noncompete provisions they described as unjustifiable and “anti-worker.”
“Today’s vote from the FTC is a step forward toward banning this unfair practice that hurts millions of workers and prevents new businesses from being able to compete on equal ground,” Demand Progress Education Fund executive director David Segal said Thursday in a statement. “In a time when millions of Americans are struggling to afford their basic needs, we should be providing more opportunity—not less.”
Matt Kent, competition policy advocate for Public Citizen, called the FTC’s Thursday move “thrilling.”
“The rule was long in the making but the strength of this proposal makes the wait worthwhile,” said Kent. “If finalized in this form, the rule would be wide-ranging, applying to independent contractors and requiring an employer to actively inform workers that existing noncompete clauses are no longer in effect.”
“The legal backing for the rule is also an exciting and overdue use of the FTC’s power to police unfair methods of competition using authority granted by Congress in Section 5 of the FTC Act,” he added.
EPI president Heidi Shierholz also praised the FTC’s regulatory initiative.
“Why do we need this rule?” Shierholz asked on Twitter. “The only source of power nonunionized workers have vis-à-vis their employers is their ability to quit and take a job elsewhere. So, SURPRISE, employers are using noncompete agreements to cut that source of worker power off at knees.”
It’s worth noting that employers do not need noncompetes to protect their trade secrets—for example, intellectual property law already provides significant legal protections for trade secrets, and employers can still use tailored non-disclosure agreements. 4/
— Heidi Shierholz (@hshierholz) January 5, 2023
“Noncompetes are about reducing competition, fullstop,” said Shierholz. “That’s bad for workers and bad for consumers. This rule would be an important step in creating an economy that works for everyone.”
The public has 60 days after the Federal Register publishes the proposed rule to submit comments. The FTC will review the comments and possibly make changes based on citizen input and the agency’s further analysis.
After applauding the FTC for “once again taking bold action where necessary to protect competition in the labor markets,” Kent urged the agency to “issue a final rule that mirrors the quality of this initial effort.”
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