Job hopping is considered the best way to improve your career and pay prospects.
Sometimes non-compete clauses get in the way. These contracts are intended to protect the investments companies have made in their business and employees. It is estimated that More ▼ of the 30 million workers – or roughly 18% of the US workforce – must sign one before accepting a job.
Recently the US Federal Trade Commission proposed a new rule banning the use of non-compete clauses in employee contracts, which suppresses wages, stifles innovation and prevents entrepreneurs from starting new businesses, the agency said.
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The proposed rule would also require companies with existing non-compete agreements to revoke them and inform current and former employees that they are cancelled.
“That’s part of what makes this so radical,” said Michael Schmidt, a labor and employment attorney at Cozen O’Connor in New York. Not only that, “the federal government takes this action widely, but practically without exception.”
As a result, the impact will be felt by companies with employees managed by non-competitors, as well as companies looking to hire workers who are not bound by competition, said Benjamin Dryden, a partner at Foley & Lardner in Washington, D.C., who specializes in labor and employment antitrust matters.
“This ordinance will affect more or less every business in the country,” he said.
Non-competes are increasingly used in industries
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“Non-competes prevent workers from freely changing jobs by depriving them of higher wages and better working conditions and depriving businesses of the talent pool they need to build and expand,” FTC Chair Lina Hahn said in a statement .
In many cases, noncompetes affect white-collar workers in fields such as finance and technology, but they are increasingly used in a wide range of industries, the FTC said, “from hairdressers and warehouse workers to doctors and business executives.”
A report by the White House and the U.S. Treasury Department found that 15 percent of workers without college degrees are subject to non-compete agreements, and 14% of workers earn less than $40,000.
A ban could raise wages by nearly $300 billion a year and reduce the pay gap between white and minority workers, as well as between men and women.
If passed, this regulation “will open up more competition between companies for workers,” said Nadja Farley, senior staff attorney at the National Employment Law Project.
Non-competes make wages and working conditions worse by eliminating one of the most effective means workers have to improve the quality of their work—advocating for or moving to a better job.
Nadja Farley
senior lawyer at the National Labor Law Project
“Employers have taken advantage of the lack of laws and regulations in this area to push these agreements on unsuspecting workers of all income levels and job titles,” Farley said.
“Non-competes worsen wages and working conditions by eliminating one of the most effective means workers have to improve the quality of their work – advocating for or moving to a better job.”
“When used appropriately, non-compete agreements are an important tool to promote innovation and preserve competition,” Sean Heather, the US Chamber of Commerce’s senior vice president of international regulatory affairs and antitrust, said in a statement.
A blanket ban is “clearly illegal,” Heather said. “Congress has never delegated to the Federal Trade Commission anything close to the authority it would need to promulgate such a competition rule.”
There are still several steps before the proposed regulation goes into effect, including the “inevitable litigation” challenging the FTC’s authority, Schmidt warned.
That rulemaking process could take up to a year or even longer if it gets tied up in the court system, Schmidt said.
What should employees do now?
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Workers who have been affected by a non-compete must send comments to the FTC regarding the proposed rule, Farley advised.
The comment period is open until March 10, and the FTC will review each submission and make changes based on that feedback. “The more people who send in comments, the better,” she said.
What employers should do now
Companies should also take advantage of the FTC’s 60-day comment period and “let their voices be heard,” Schmidt advised.
It’s meant to be a “constructive process,” Dryden said. “If you think this will harm your legitimate business, send comments to the Federal Trade Commission explaining your thoughts.
“I wouldn’t be surprised if the FTC ends up reducing this regulation,” he added.
Still, “momentum has obviously built toward it,” Dryden said. In fact, many states already have restrictions on non-compete agreements, and it’s not surprising that the federal government is testing a blanket ban under Section 5 of the FTC Act, which prohibits unfair methods of competition, he said.
“It’s too early for businesses to take drastic action, but companies need to be aware that this is a real risk,” Dryden said.
For now, “use this as a reason to look, as an organization, at how you protect your business,” Schmidt advised. There may be other contracts, such as non-disclosure agreements or non-solicitation agreements, that can achieve the same goal.
“Even if this FTC rule ultimately doesn’t survive, state and local governments are becoming more proactive,” he said.
“We will continue to see this trend of restrictions and restrictions, whether they are from state legislatures or state attorneys general.”
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