The Federal Trade Commission on Thursday decided to make it easier for American employees to change jobs by banning “non-compete clauses”.
The 3:1 vote(Opens in a new window) The four commissioners of the FTC found that these common provisions in employment contracts constituted an unfair form of competition — as in the kind of problem the FTC was founded to solve in 1914(Opens in a new window). She will now hold a public statement on her proposed rule(Opens in a new window) they forbid.
Non-compete agreements give a job contractual survival by having the employee agree not to work for a competitor or start a competing business for a specified period of time – often a year – and sometimes in a specified location. Breaking one can leave an employee on the receiving end of a lawsuit; Fear of possible legislation alone is enough to keep many workers on board.
“Intentionally, non-competition clauses often exclude a worker’s most natural alternative employment opportunity: jobs in the same geographic region and occupational field,” FTC Chair Lina Khan wrote in a statement(Opens in a new window) along with Commissioners Alvaro Bedoya and Rebecca Slaughter. “These restrictions can undermine fundamental economic freedoms and affect Americans’ ability to freely change jobs.”
The proposed rule estimates that non-compete clauses today affect about 30 million American workers, or one in five overall, and that a ban “would increase American workers’ earnings by between $250 billion and $296 billion a year.” It would therefore prohibit employers from requiring workers to accept non-compete clauses and require them to lift existing non-compete clauses within 180 days of publication of the final rule.
Khan’s statement outlines three possible changes to the rule: whether it should cover executives, how it might apply to franchisors and franchisees, and how the FTC could confirm that employers can still use alternative measures such as confidentiality clauses or trade secret laws to protect their own investments .
Executive Order of President Biden of July 9, 2021(Opens in a new window) on competition policy — which has already urged regulators to consider right-to-repair policies and has prompted the FTC to request public input on its approaches to digital mergers — has mandated the FTC to crack down on non-competition clauses. But Khan’s order says the commission began examining these provisions four years ago.
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Proponents of non-compete prohibitions do not need to cite other countries to cite potential benefits: California law prohibits them entirely(Opens in a new window) as a trade restraint, and state courts consistently refuse to enforce it.
Several economic studies (e.g. a paper from 2005(Opens in a new window) for the National Bureau of Economic Research) have found that the resulting freedom to change jobs and start startups has helped(Opens in a new window) Making Silicon Valley more innovative and competitive. Other states have yet to take the hint and abolish non-competition clauses, though they have tried to position themselves(Opens in a new window) as silicon [fill in the blank]; the FTC’s action could now do them all a favor.
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