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FTC proposes rule banning non-competition clauses, which hurt workers and competition

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The Federal Trade Commission has proposed a new rule that would prohibit employers from imposing non-competition on their workers, a widespread and often exploitative practice that suppresses wages, stifles innovation and prevents entrepreneurs from starting new businesses. By ending this practice, the agency estimates the proposed new rule could raise wages by nearly $300 billion a year and expand career opportunities for about 30 million Americans.

The FTC is seeking public comment on the proposed rule, which is based on a preliminary finding that non-competitions constitute a method of unfair competition and therefore violate Section 5 of the Federal Trade Commission Act.

“The freedom to change jobs is essential to economic freedom and a competitive and prosperous economy,” said President Lina M. Khan. “Non-competition prevents workers from freely changing jobs, depriving them of higher wages and better working conditions, and depriving companies of a pool of talent they need to build and grow. Putting an end to this practice, the rule proposed by the FTC would encourage greater dynamism, innovation and healthy competition.

Companies use non-competition for workers in all industries and job levels, from hairstylists and warehouse workers to doctors and corporate executives. In many cases, employers use their excessive bargaining power to coerce workers into signing these contracts. Non-competition harms competition in U.S. labor markets by preventing workers from seeking better opportunities and preventing employers from hiring the best available talent.

“Research shows that employers’ use of non-competition to restrict worker mobility significantly suppresses workers’ wages, even for those who are not subject to non-competition or who are subject to non- competitions that are unenforceable under state law,” said Elizabeth Wilkins, director of the Office of Policy. “The proposed rule would ensure that employers cannot use their outsized bargaining power to limit workers’ opportunities and stifle competition.”

Evidence shows that non-competition clauses also hinder business innovation and dynamism in myriad ways, from preventing would-be entrepreneurs from setting up competing businesses to preventing workers from contributing innovative ideas to new businesses. This ultimately harms consumers; in markets with fewer new entrants and greater concentration, consumers may face higher prices, as seen in the healthcare sector.

To address these issues, the FTC’s proposed rule would generally prohibit employers from using non-competition clauses. Specifically, the new FTC rule would make it illegal for an employer to:

  • enter into or attempt to enter into a non-competition clause with a worker;
  • maintaining a non-competition with a worker; or
  • represent to a worker, in certain circumstances, that he is the subject of a non-competition clause.

The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also require employers to rescind existing non-competition clauses and actively notify workers that they are no longer in effect.

The proposed rule would generally not apply to other types of employment restrictions, such as nondisclosure agreements. However, other types of employment restrictions could be subject to the rule if they are so broad in scope that they operate as non-competition clauses.

This NPRM aligns with the FTC’s recent statement to reinvigorate Section 5 of the FTC Act, which prohibits methods of unfair competition. The FTC recently used its authority under Section 5 to prohibit companies from imposing onerous non-competition clauses on their workers. In a lawsuit, the FTC took action against a Michigan-based security guard company and its top executives for using coercive non-competitions against low-wage employees. The Commission also ordered two of America’s largest glass container makers to stop imposing non-competition on their workers because they hinder competition and prevent new companies from hiring the talent needed to enter the market. market. This NPRM and recent enforcement actions advance the agency’s broader initiative to use all of its tools and powers to promote fair competition in labor markets.

The Commission voted 3 to 1 to issue the Notice of Proposed Rulemaking, which is the first step in the FTC’s regulatory process. President Khan, Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro Bedoya released a statement. Commissioner Slaughter, joined by Commissioner Bedoya, issued an additional statement. Commissioner Christine S. Wilson voted no and also released a statement. The NPRM invites the public to submit comments on the proposed rule. The FTC will consider the comments and may make changes, in a final rule, based on the comments and the FTC’s thorough analysis of the matter. Comments will be due 60 days after the Federal Register publishes the proposed rule.

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