FTC proposes to ban noncompete clauses. Move will help workers, entrepreneurs.

The Federal Trade Commission proposed a new rule Thursday to ban the use of noncompete clauses in worker contracts, a change that would significantly boost the negotiating power of employees.

The proposal is based on the FTC’s finding that noncompete clauses violate its fair trade laws, with the agency calling them a “widespread and often exploitative practice that suppresses wages, hampers innovation and blocks entrepreneurs from starting new businesses.”

The FTC estimates that the new rule could increase wages by some $300 billion a year.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” FTC Chairwoman Lina M. Khan said in a statement. “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.”

Noncompete clauses — legal stipulations that prevent workers from going to work for or starting a competing business within a certain time period after leaving a job —  are used in a variety of industries and job levels. Their use has grown in recent years, and many economists believe they are a significant contributing factor to stagnating wages. According to a 2019 study by the left-leaning Economic Policy Institute, somewhere between a quarter to about a half of all workers are subject to noncompete clauses.

“Given the ubiquity of noncompetes, the real harm they inflict on workers and competition, and the fact that they are part of a growing trend of employers requiring their workers to sign away their rights as a condition of employment, noncompetes can and should be prohibited either through legislation or through regulation,” the institute said in the study. 

The FTC said that 1 out of 5 workers are bound by noncompete clauses. 

The agency voted 3-1 on the rule, with Christine Wilson, appointed by then-President Donald Trump, voting against it. Wilson said she believed the rule was outside the FTC’s scope and would be vulnerable to legal challenges.

“The proposed Non-Compete Clause Rule represents a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable in duration and scope, given the business justification for the restriction,” she said in a statement.