US prohibits non-competition agreements in employment contracts

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In a wide-ranging move that could raise wages and increase competition between companies, the Federal Trade Commission on Thursday unveiled a rule that would prevent companies from limiting their employees’ ability to work for a rival.

The proposed rule would ban provisions in employment contracts called non-compete agreements, which prevent workers from leaving for a competitor or starting a competing business for months or years after their employment, often in a certain geographic area. The agreements applied to workers as varied as sandwich makers, hairdressers, doctors and software engineers.

Studies show that non-competition, which seems to directly affect about 20-45% of private sector workers in the United States, constrains wages because changing jobs is one of the most reliable ways to get a job. increase. Many economists believe they help explain why the earnings of middle-income workers have stagnated in recent decades.

Other studies show that non-competition protects established businesses from start-ups, reducing competition within industries. Arrangements can also hurt productivity by making it difficult for companies to hire workers who best meet their needs.

The FTC’s proposal is the latest in a series of aggressive and sometimes unorthodox moves to rein in big business power under agencies chairman Lina 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, said Ms Khan in a statement announcing the proposal. By putting an end to this practice, the rule proposed by the CECs would promote greater dynamism, innovation and healthy competition.

The public will be allowed to submit comments on the proposal for 60 days, after which the agency will decide whether to make it final. An FTC document said the rule would go into effect 180 days after the final version is released, but experts said it could face legal challenges.

The agency estimated the rule could boost wages by nearly $300 billion a year across the economy. Evan Starr, an economist at the University of Maryland who has studied non-competition, said it was a plausible pay rise after they were eliminated.

Dr Starr said the non-competition appeared to reduce wages for workers directly covered by them and other workers, in part by making the hiring process more costly for employers, who must spend time figuring out who they can. hire and who they can’t.

He pointed to research showing that salaries tended to be higher in states that restrict non-competition. A study found that wages for newly hired tech workers in Hawaii increased by about 4% after the state banned such workers from non-competition. In Oregon, where new non-competitions became unenforceable for low-wage workers in 2008, the change appeared to raise wages for hourly workers by 2-3%.

The state of employment in the United States Economists have been surprised by the recent strength of the labor market, as the Federal Reserve tries to engineer a slowdown and bring inflation under control.

Although non-competitions seem to be more common among higher-paid, better-educated workers, many companies have used them for low-wage hourly workers and even interns.

About half of the states severely limit the use of non-concurrences, and a small number have deemed them largely unenforceable, including California.

But even in those states, companies often include non-competition in employment contracts, and many workers in those states report turning down job offers in part because of the provisions, suggesting that those state regulations may have limited effects. According to experts, many workers in these states are not necessarily aware that the provisions are unenforceable.

Research shows that employers’ use of non-competition to restrict worker mobility dramatically suppresses worker wages, even for those who are not subject to non-competition or who are subject to non-competition unenforceable under state law, said Elizabeth Wilkins, director of the FTC’s Office of Policy Planning. statement.

The commission’s proposal appears to address this issue by requiring employers to remove existing non-competition clauses and inform workers that they no longer apply. The proposal would also make it illegal for an employer to enter into or attempt to enter into a non-competition clause with a worker, or to suggest that a worker is bound by a non-competition clause when they are not. is not.

The proposal not only covers employees, but also independent contractors, interns, volunteers and other workers.

Non-competition advocates argue that employees are free to refuse employment if they want to preserve their ability to join another company, or that they can negotiate a higher salary in exchange for agreeing to the restriction. Proponents also argue that non-competition makes employers more likely to invest in training and share sensitive information with workers, which they might withhold if they fear a worker may leave soon.

A ban ignores the fact that, when used appropriately, non-competition agreements are an important tool for fostering innovation, said Sean Heather, senior vice president of the U.S. Chamber of Commerce, in a communicated.

At least one study has found that greater enforcement of non-competition leads to increased job creation by start-ups, although some of its findings contradict other research.

Dr Starr said the non-competitions appeared to encourage companies to invest more in training, but there was little evidence that most employees participated voluntarily or that they were able to negotiate them. One study found that only 10% of workers sought to negotiate concessions in exchange for signing a non-competition clause. About a third only learned of the non-competition after accepting a job offer.

Michael R. Strain, an economist at the American Enterprise Institute, said that while there were good reasons to reduce non-competition for low-wage workers, the rationale was less clear for higher-paid workers with knowledge. or specialized skills.

If your job is to make minor changes to Coca-Cola’s formula and you’re one of 25 people on earth who know the formula, Dr. Strain said, speaking hypothetically, it makes perfect sense that Coke -Cola could say, We don’t want you to go to work for Pepsi.

He said it might be possible to satisfy an employer’s concerns with a less blunt tool, like a non-disclosure agreement, but the evidence for this was lacking.

In a video call with reporters on Wednesday, Khan said she believes the FTC has clear authority to issue the rule, noting that federal law empowers the agency to prohibit methods of unfair competition.

But Kristen Limarzi, a partner at Gibson, Dunn & Crutcher who was previously a senior official in the Justice Department’s antitrust division, said she thinks such a rule could be vulnerable to legal challenge. Opponents would likely argue that the relevant federal law is too vague to guide the agency in crafting a rule prohibiting non-competition, she said, and that the evidence the agency has on their effects are still too limited to support a rule.

As head of the FTC since last year, Ms. Khan has tried to use the agency’s authority in untested ways to curb the power and influence of corporate giants. By doing so, she and her allies hope to reverse the shift of the past few decades toward more conservative antitrust law, a shift they say has enabled rampant concentration, limited consumer options and squeezed small businesses.

Ms Khan has filed lawsuits in recent months to stop Facebook’s parent company Meta from buying a virtual reality start-up and Microsoft from buying video game publisher Activision Blizzard. Both cases use less common legal arguments that are subject to scrutiny by the courts. But Ms Khan has indicated she is ready to lose business if the agency ends up taking more risks.

Ms Khan and her counterpart in the Justice Department’s antitrust division, Jonathan Kanter, also said they want national antitrust agencies to focus more on empowering workers. Last year, the Department of Justice succeeded in preventing Penguin Random House from buying Simon & Schuster, using the argument that the deal would reduce authors’ compensation.

A question that looms over the discussion of non-competition is what effect banning it may have on prices during a period of high inflation, since limiting non-competition tends to raise wages.

But the experience of the past two years, when quit and job switching rates have been exceptionally high, suggests that non-competition may not currently be as significant a barrier to worker mobility as it always has been. Partly for this reason, banning them may not have much short-term effect on wages.

Instead, according to some economists, the more pronounced effect of a ban could come in the medium to long term, once the labor market eases and workers no longer have as much leverage. At this point, non-competitions could start to weigh more heavily on job change and wages again.

Doing something like this is a way to help sustain the rise in workers’ power over the past two years, said Heidi Shierholz, president of the Liberal Institute for Economic Policy, who was chief economist at the Department of work under the Obama administration.

David McCabe contributed reporting.

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