FTC Proposes Banning Noncompete Clauses for Workers
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FTC Proposes Banning Noncompete Clauses for Workers
Move would allow former employees to take jobs with rival companies or start competing businesses
The Federal Trade Commission says noncompete clauses have been imposed on lower-wage workers who lack access to trade secrets.
By Dave MichaelsFollow
Updated Jan. 5, 2023 2:06 pm ET
WASHINGTON—The Federal Trade Commission on Thursday issued a plan to ban noncompete clauses, a proposal that would allow workers to take jobs with rival companies or start competing businesses but raises the prospect of legal opposition from companies that say the practice has a legitimate purpose.
The FTC said noncompete clauses constitute an exploitative practice that undermines a 109-year-old law prohibiting unfair methods of competition. Noncompete clauses, which typically bar employees from joining a competitor for a period after they quit, affect nearly one in five American workers, according to the agency. Long associated with higher-paid managers, the clauses have also been imposed on lower-wage workers who lack access to trade secrets, strategic plans and other reasons that could be cited for hampering job switchers, the agency says.
If the FTC eventually votes to adopt the proposal, companies would have to rescind noncompete requirements they impose on workers and let employees know about the change. FTC officials say noncompetes suppress wages, restrain new business formation and hurt the ability of companies to hire workers they need to grow.
“Noncompetes are basically locking up workers, which means they are not able to match with the best jobs,” Chair Lina Khan said on a call with reporters Wednesday. “This is bad for competition. It is bad for business dynamism. It is bad for innovation.”
Noncompetes can even affect workers who lose their jobs and then can’t land a similar role because of the restriction. Alex Mumm, 28, said he was laid off in September from his sales manager job at Majic Plastics, an industrial recycling company in St. Charles, Ill., with which he had signed a noncompete agreement when he joined several years earlier.
Soon after he got a new job in recycling, he said, a Majic representative contacted him and threatened legal action. He quit the new job that same day, he said. He said it would be difficult to find a role in his industry that doesn’t violate the noncompete, which is in effect for a year.
“It’s something I didn’t really think about until it happened to me,” he said. “At the end of the day, you’re talking about the livelihood of people, their lives and their families.”
Majic didn’t immediately respond to requests for comment.
In a full discussion of the proposal made public Thursday, the FTC estimated that getting rid of noncompetes would increase employee earnings annually by as much as $296 billion. Some of that value represents an income transfer from firms to workers, and from consumers to workers if firms raise prices because they need to increase wages to retain workers, the agency said.
The four-member commission voted 3-1 last month to issue the proposal, which is subject to a 60-day period of public comment before it can be adopted as a regulation. Republican Commissioner Christine Wilson voted against the plan, writing in a dissent that the FTC has gathered only scant evidence to support a complete ban on noncompete agreements.
The proposal was expected by business groups, which sometimes say noncompetes have beneficial effects, such as safeguarding confidential customer data and intellectual property. Ms. Khan said in an interview with The Wall Street Journal in June that it was an urgent task for the FTC to rein in the growth of noncompete agreements.
President Biden 18 months ago called on the FTC to ban or limit clauses in employment contracts that restrict workers’ freedom to change jobs. Most states limit noncompete clauses or require the restrictions be reasonable, which leaves them open to judicial interpretations. A handful of states, including California, say the clauses are unenforceable in employment contracts.
The rule, which would pre-empt many state laws, could have a big impact in states such as Georgia, which amended its law in 2011 to give businesses more flexibility in using noncompetes.
The state law generally allows two-year noncompetes for key employees, managers and other supervisors, sales personnel who negotiate with customers, and people who obtain orders or contracts for the company, said Neal Weinrich, an Atlanta attorney who focuses on noncompete agreements and trade secrets.
Employees bound by noncompetes generally don’t want to leave their jobs because they worry about violating the deal with their employer or fear another local company won’t hire them, Mr. Weinrich said. “Georgia is much more employer friendly” than before the 2011 law change, he said.
The rule proposal is the first time in decades that the FTC has embarked on a rule-making project that seeks to broadly outlaw business conduct on competitive grounds. Some conservatives have argued that the FTC lacks authority to write rules targeting anticompetitive practices.
“The rule proposes to regulate a significant portion of the American economy through a ban on noncompetes,” Ms. Wilson wrote in the dissent. A rule “indisputably will negate millions of private contractual agreements and impact employer/employee relationships in a wide variety of industries across the United States.”
The U.S. Chamber of Commerce said Thursday it is weighing a lawsuit over the proposal if it is adopted. “We don’t believe they have the statutory authority,” said Sean Heather, the Chamber’s senior vice president for international regulatory affairs and antitrust issues. “They know they are on very tenuous ground.”
The FTC’s proposal includes one exception for noncompetes between buyers and sellers of companies. The restricted person would need to have owned at least 25% of the firm, according to the FTC’s plan.
Federal regulators have faced headwinds from the courts in recent years over policies and enforcement tactics that some judges found to exceed the agencies’ statutory authority.
Last year, the Supreme Court said in an opinion targeting an environmental-protection rule that when federal agencies issue regulations with sweeping economic and political consequences, the measures are presumptively invalid unless Congress specifically authorized the action.
Ms. Khan has argued that the FTC has clear authority to write competition rules and has written that drafting regulations is a more efficient way to inform businesses and consumers about what the law allows. Historically, the agency has used its enforcement cases to show which acts or practices cross the line.
“There is very strong support for us taking this action,” Ms. Khan said.
The FTC has also moved under Ms. Khan to step up how it uses enforcement to go after unfair methods of competition.
On Wednesday, the FTC announced settlements with several companies that it said collectively required thousands of employees to sign noncompete agreements. The companies agreed to drop the provisions and stop enforcing them against any workers they accused of violating the rule.
The FTC said one of the defendants, Prudential Security Inc. and Prudential Command Inc., required low-wage security guards to sign contracts that barred them for two years from working for a competing firm within a 100-mile radius of where they had been stationed for Prudential. The employees typically earned wages close to the minimum wage, but Prudential’s restrictions said they would have to pay a $100,000 fine if they violated the noncompete clause, the FTC said.
Prudential Security and Prudential Command had common ownership and were based in Michigan but operated in several states, the FTC said. The companies’ owners last year sold their security business to another firm that doesn’t subject the employees to noncompete clauses, the FTC said in a legal complaint. The owners of the security companies couldn’t be reached for comment.
Lindsay Ellis contributed to this article.