FTC ruling could end noncompete agreements
The Federal Trade Commission (FTC) has issued a proposal to adopt a near-total ban on noncompete agreements (NCAs) between employers and workers.
The ban, which would end the prohibition on some workers being able to leave a job and get hired by another company in the same industry or to potentially start a company in that same industry, would go into force nationwide.
According to the FTC, 18% of the U.S. population––some 30 million people––have signed NCAs.
“Noncompete agreements bind about one in five American workers. That’s astounding,” FTC Commissioner Rebecca Kelly Slaughter said during her agency’s announcement of the decision. “And this is not limited to one sector of the economy or category of workers. Low and high wage workers, skilled and unskilled workers; this problem affects so many. And in fact, it really affects all of us. Even if no one in your family is subject to a noncompete agreement for their own employment, the record in our rulemaking proceeding makes clear: noncompetes prevent new business formation, slow innovation, and deprive consumers of the better products and better prices we expect from competitive markets.”
Unions applauded the announcement. The Teamsters took to X/Twitter to call the FTC proposal, “A BIG win for working families and a big defeat for predatory corporations!”
Studies have found that when employees sign NCAs it limits their ability to earn income, because they’re stuck working for one employer who has hired them based on the skillset they have for that specific industry. The National Bureau of Economic Research wrote that enforcement of NCAs can be detrimental to the economic prospects of Black workers because “Black individuals are less likely to migrate far away from their hometown, and they are less likely to migrate in response to earnings increases elsewhere. [T]hese differences predict that NCA enforceability will cause greater earnings penalties for historically disfavored workers.”
Even though legal action around NCAs are not often enforced, once an employee has signed one they are hesitant to do anything that might violate its clauses, the non-profit Economic Policy Institute found: “Most noncompete agreements never make it to court: workers assume they are valid, or workers can’t afford to take on the risk and expense of possible litigation. A typical employee who is reminded that they have signed a noncompete or receiving an intimidating letter from the employer’s legal counsel simply may accept that working for a competitor is not an option rather than taking the risk of being sued. This results in a chilling effect, as workers stay in their jobs regardless of the actual enforceability of their noncompete agreements.”
Noncompetes hinder economic progress
An April 23 FTC fact sheet assessed that noncompetes have stalled economic progress. Banning NCAs, the agency claims, will lead to a 2.7% increase in new businesses, the creation of more than 8,500 new businesses each year, and an estimated “$400-$488 billion in increased wages for workers over the next decade.”
The FTC rule will go into effect within 120 days of its publication in the Federal Register unless it is halted by legal challenges. The United States Chamber of Commerce, a pro-business group, has already said it will challenge the ruling. “Since its inception over 100 years ago,” the Chamber said in a statement, “the FTC has never been granted the constitutional and statutory authority to write its own competition rules. This decision sets a dangerous precedent for government micromanagement of business.”
The business lobbying group asserted that “67% of our respondents agreed that a near-total ban on noncompete agreements would have a negative impact on their business’s talent strategy and/or compensation strategy. Our survey found that employers would have to reduce the sharing of sensitive information with employees and reduce or defer compensation with employees should this ban take effect.”
Federal Trade Commission Chair Lina Khan claims that “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned.”
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