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Feds propose rule that would ban non-compete clauses

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The Federal Trade Commission is proposing a new rule that would prevent employers from imposing non-compete clauses on workers. These types of arrangements, long criticized by progressives and some free-market advocates, typically prevent a worker from joining a competitor for some time after leaving the company.

President Biden praised the proposed rule, calling it “a huge step forward”. The FTC’s move follows a executive order he signed in 2021 targeting anti-competitive practices in tech, healthcare and other parts of the economy. The order included a request for prohibition or limiting non-compete agreements to help raise wages.

“The freedom to change jobs is fundamental to economic freedom and a competitive and thriving economy,” FTC Chair Lina Khan said in a statement. “Uncompetitive ones prevent workers from changing jobs freely, depriving them of higher wages and better working conditions and depriving companies of a pool of talent they need to build and expand.”

The proposed rule would make it illegal for an employer to enter into or attempt to enter into a non-compete with a worker, or to represent to a worker, under certain circumstances, that he is subject to a non-compete. The rule also invalidates existing non-compete agreements.

“This is a highly successful development in the world of employment,” said Peter Rahbar, a New York employment attorney who has represented both employers and workers.

I didn’t like it, but common

Non-compete agreements have become increasingly common in the workplace. An estimate by the left-wing Economic Policy Institute found that a third of companies require all their employees to sign non-competitive contracts — including many hourly workers in low-paying jobs such as cleaning, food service and security.

States have begun regulating non-competitors by limiting what workers can sign them or requiring companies to pay more to apply for a non-tender, and studies have shown that states that limit these restrictive agreements, see workers’ wages rise after.

Progressives in Congress praised the proposed rule, calling it a “great pro-worker movement”.

The proposed rule comes a day after the FTC settled with three companies which required its employees to sign non-competitors, including a Michigan-based security firm that threatened minimum wage guards with a $100,000 fine if they took a job at a competitor.

The FTC estimates that the new rule could increase wages by nearly $300 billion a year and expand career opportunities for an estimated 30 million Americans.

Still, the rule will likely be challenged in the courts, with the US Chamber of Commerce calling it “flagrantly illegal”.

“It is hard to overstate the scope of this FTC overreach in not running – legally and in terms of public policy –,” Neil Bradley, House policy chief, said on twitter.

The FTC’s proposal is based on a preliminary finding that non-compete clauses nullify competition, violating Section 5 of the Federal Trade Commission Act. Section 5 prohibits unfair methods of competition.

It applies to independent contractors and anyone working for any company, whether paid or unpaid. It would also require employers to rescind existing non-compete clauses and actively inform workers that they are no longer in effect.

The proposed rule generally does not apply to other types of employment restrictions, such as non-disclosure agreements, but other types of employment restrictions may be subject to the rule if they are so broad that they function as non-compete clauses. Nor would it apply to agreements between companies and their franchisees.

Protecting your investment

Employers who use noncompetitors say it’s necessary to protect trade secrets or other confidential information that employees might learn in the course of their jobs.

“Employers will say these restrictions are necessary to promote innovation because we’re losing employees all the time and they’re taking information with them, so we can’t innovate,” Rahbar said. He noted that even if the FTC ban goes into effect, employers will have other tools, such as non-disclosure agreements, that would limit the information workers could obtain from the company.

“This will, and should, cause employers to look back on how to protect what’s important to them,” he said. “With employees, that means paying them more, treating them better and thinking about how to encourage someone to stay with you instead of forbidding them to leave. Employers will have to work harder to keep their employees.”

With reporting from the Associated Press.