FTC says proposed ban of noncompete clauses would strengthen workers’ hand

The Federal Trade Commission proposed a new rule Thursday to ban the use of noncompete clauses in worker contracts, a change that would significantly boost employees’ negotiating powers.

The proposal is based on the FTC’s finding that noncompete clauses violate its fair trade laws, with the agency calling them a “widespread and often exploitative practice that suppresses wages, hampers innovation and blocks entrepreneurs from starting new businesses.”

The FTC estimates that the new rule could increase wages by some $300 billion a year.

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

Noncompete clauses — legal stipulations that prevent workers from going to work for or starting a competing business within a certain time period after leaving a job —  are used in a variety of industries and job levels. Their use has grown in recent years, and many economists believe they are a significant factor contributing to stagnating wages.

The FTC said that 1 out of 5 workers are bound by noncompete clauses. 

According to a 2019 study by the left-leaning Economic Policy Institute, somewhere between a quarter to about a half of all workers are subject to noncompete clauses.

President Joe Biden hailed the 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 told reporters Thursday.

Advocates for noncompetes see them as an incentive for companies, particularly those engaged in higher skilled work, to invest in employees with the comfort those expenditures will bear out. They are also one way for companies to protect high-level, confidential information from being brought to competitors. 

But some studies have demonstrated that expanded use of noncompetes may be harming workers’ wages by restricting their mobility and potentially limiting the competition that powers the economy. 

“First, non-competes reduce pay for lower-wage workers,” a study from the Minneapolis Federal Reserve Bank noted. “Second, low-wage workers have less access to legal advice than other workers have, making it more difficult for them to enter a fair, well-informed negotiation with employers over their non-compete contracts.” 

Noncompete clauses have been reported at companies including the sandwich chain Jimmy John’s, which prevented workers from working at any company within three miles of a company shop that derived more than 10% of its revenue from selling sandwiches for two years, and Amazon, which required even some temp warehouse workers to sign noncompetes according to a report in The Verge from 2015. Some summer camps have also used them, and companies have even employed them during internships. 

Jimmy John’s, which did not immediately respond to NBC News’ request for comment, agreed to drop the practice in 2016 under legal pressure from multiple states’ attorneys general. Amazon also did not immediately respond to a request for comment.  

One study of more than 11,000 workers found that a third of them learned about their noncompete clauses only after accepting their job offers — limiting their ability to bargain over the issue. The 2015 study published in the Journal of Law and Economics also found only 10% of employees negotiated over the clause. Most assumed it was either nonnegotiable or likely to cause issues with their employer.

Kenneth Dau-Schmidt, an employment law expert at the University of Indiana, said that noncompete clauses made sense when they were used mostly for employees in the highest level jobs — CEOs and other executives, research scientists and high-level engineers — but that their wider use required action. 

“They’ve been put to ridiculous extremes, and as a result they’re starting to have a negative effect on our economy. Our labor markets are less competitive than they used to be,” he said.

Dau-Schmidt expected the FTC’s proposal to draw blowback from the business community and said it could likely end up being more narrowly targeted.

The agency voted 3-to-1 on the rule, with Christine Wilson, a Trump-appointee, voting against it. Wilson said she believed the rule was outside the FTC’s scope and would be vulnerable to legal challenges.

“The proposed Non-Compete Clause Rule represents a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable in duration and scope, given the business justification for the restriction,” she said in a statement.

The FTC will open up a 60-day comment period for the proposed rule before finalizing it later this year. 

Ted Sichelman, a law professor at the University of San Diego who has written favorably of noncompete clauses, said he believed the FTC’s proposal went too far. Sichelman co-authored a prominent analysis of the studies critical of noncompetes, and says that many are based on flawed understandings of state laws. 

“For many companies, particularly those that rely on trade secrets, noncompetes are very important,” he said.

He said he would potentially support a rule that sought to eliminate noncompetes for low-wage work. 

The Chamber of Commerce slammed the FTC’s proposal and said it believed it would not hold up in court. 

“Today’s actions by the Federal Trade Commission to outright ban noncompete clauses in all employer contracts is blatantly unlawful,” senior vice president Sean Heather said in a statement. “Attempting to ban noncompete clauses in all employment circumstances overturns well-established state laws which have long governed their use and ignores the fact that, when appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition.”

At least 10 states ban the use of noncompete offers for low-wage workers by reducing their pay. A 2021 study found that a ban in Oregon against the clauses for lower wage workers helped wages rise by 2% to 3%.