The Federal Trade Commission proposed a new regulation that would prohibit employers from putting noncompete clauses on their employees, a common and frequently abusive practice that cuts salaries, stifles innovation, and prevents entrepreneurs from launching new ventures. By prohibiting this practice, the government predicts that the new proposed rule will raise salaries by $300 billion per year and boost job prospects for approximately 30 million Americans.
According to the FTC, the new rule could improve workers’ pay by over $300 billion each year. Noncompete contracts hurt workers and stifle fair competition. The FTC is seeking public input on the proposed rule, which is based on a preliminary determination that noncompetes are an unfair form of competition and thus violate Section 5 of the Federal Trade Commission Act.
Noncompete agreements are used by businesses for employees in a variety of industries and job levels, ranging from hairstylists and warehouse workers to doctors and corporate leaders. Employers frequently utilize their disproportionate bargaining power to compel employees into signing these contracts. Noncompete clauses undermine competition in US labor markets by restricting workers from seeking better opportunities and businesses from obtaining the best available talent.
“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said Chair Lina M. Khan. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
“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 Office of Policy Planning. “The proposed rule would ensure that employers can’t exploit their outsized bargaining power to limit workers’ opportunities and stifle competition.”
The evidence shows that noncompete clauses also hinder innovation and business dynamism in multiple ways–from preventing would-be entrepreneurs from forming competing businesses, to inhibiting workers from bringing innovative ideas to new companies. This ultimately harms consumers; in markets with fewer new entrants and greater concentration, consumers can face higher prices–as seen in the health care sector.
The proposed rule would apply to independent contractors as well as everyone who works for a company, whether paid or unpaid. It would also force businesses to terminate existing noncompetes and aggressively notify employees that they are no longer in effect.
Other types of employment restrictions, such as nondisclosure agreements, would be exempt from the proposed rule. Other sorts of employment restrictions, on the other hand, may be subject to the rule if they are so broad in scope that they act as noncompetes.
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