The Federal Trade Commission has proposed a rule that would ban the use of non-compete clauses in employment contracts, which affect as many as 18% of all workers in the United States.
Non-compete clauses suppress wages, hamper innovation, and block entrepreneurs from starting new businesses, the FTC argues, and getting rid of them could increase wages by as much as $300 billion per year.
Non-compete clauses prevent employees from working for a competing employer or starting a competing business after their employment ends, usually for a proscribed period of time. The intention is to protect companies from employees taking information to a competitor or using it to start their own business.
Under the proposed rule, a non-compete clause would become an unfair method of competition and would apply not just to new non-compete clauses, but existing ones as well. There would be a carved-out limited exception for non-compete clauses between the buyer and seller of a business, provided that the person restricted by the non-compete clause owns at least 25% of the business.
“Research shows that employers’ use of noncompetes to restrict workers’ mobility significantly suppresses workers’ wages—even for those not subject to noncompetes, or subject to noncompetes that are unenforceable under state law,” said Elizabeth Wilkins, Director of the FTC’s Office of Policy Planning, in a statement. “The proposed rule would ensure that employers can’t exploit their outsized bargaining power to limit workers’ opportunities and stifle competition.”
Along with increasing the amount of earnings for employees, eliminating non-compete clauses would help consumers save as much as $150 billion in healthcare costs, according to the FTC.
In issuing the proposed rule, the FTC is seeking comment on whether senior executives should be exempted from the rule or subject to a rebuttable presumption rather than an outright ban, whether the amount that an employee earns should impact how they are treated under the rule, and whether franchisees would be covered.
In conjunction with the issuance of the proposed rule, the FTC announced it had filed a lawsuit against a security company for imposing non-compete clauses in agreements with security guards, who were prevented from working at another security company within a 100-mile radius of their job site for two years after they left the company. In most cases, the security guards were earning minimum wage.