FTC Proposes a Ban on Non-Compete Contracts for Employees (1)

The US Federal Trade Commission is proposing a ban on non-compete clauses in employment contracts that keep workers from switching jobs — a sweeping rule likely to affect millions of Americans.

The proposal would bar employers from entering into or enforcing such clauses with employees or independent contractors and require companies to nullify any existing ones within six months. The ban would exempt companies that want to require an owner or partner selling a business from immediately re-entering the field.

“Non-competes are bad for workers and undermine labor competition,” FTC Chair Lina Khan told reporters in a news conference announcing the proposed rule. “When one set of workers are locked in place, that reduces overall churn.”

About one in five Americans is bound by a non-compete agreement, a March 2022 Treasury Department reports found. The figure is higher in some industries, such as technology and health care where studies have found as many as 45% of primary care physicians and between 35% and 45% of tech workers are bound by non-compete clauses.

The agency will accept public comments on the proposal within 60 days and consider those submissions before it issues a final version of the rules.

In a press release announcing the proposal on Thursday, the FTC said the restrictions “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.”

Sean Heatherhead of international regulatory affairs and antitrust for the US Chamber of Commercecalled the proposal “blatantly unlawful” and described non-compete clauses “an important tool in fostering innovation and preserving competition.”

Earlier: Biden’s Push for More Competition: What’s in the Executive Order

Labor advocates and public officials have taken an aggressive stance against practices they see as anti-competitive. State attorneys general, for example, have secured agreements in recent years from fast food companies to stop prohibiting their franchisees from hiring away each other’s workers.

Silicon Valley companies including Apple Inc., Alphabet Inc.‘s Google, Adobe Inc.and Intel Corp. agreed to a $415 million settlement in 2015 over allegations that they conspired to avoid luring each other’s staff.

In a July 2021 executive order on competition, President Joe Biden urged the FTC to move forward with new rules on non-compete clauses. A coalition of groups including the labor organizations AFL-CIO and the Service Employees International Union, Democratic senators and attorneys general from California, Illinois and 17 other states have also thrown their support behind a rule.

The agreements, which often bar workers from switching jobs within a certain period, are already illegal in some states, including California, North Dakota and Oklahoma, while Illinois, Washington and others have passed laws limiting their use, particularly among low-wage workers.

The proposal is the FTC’s second major rule under Khan. The agency last year acted online privacy.

“The agency is once again taking bold action where necessary to protect competition in the labor market,” Matt Kentcompetition policy advocate for the consumer advocacy group Public Citizen, said in an emailed statement.

On Wednesday, the FTC announced cases against three companies – Ardagh Group SA, Owens-Illinois Group Inc. and Prudential Security Inc. – for requiring workers to enter illegal non-compete agreements. Each of the companies agreed to a settlement in which they promised to stop requiring workers to enter non-competes and would inform former employees that the agreement was now void.

(Updates with Chamber comment in the seventh and Public Citizen in penultimate paragraphs)

–With assistance from Josh Eidelson and Anna Edgerton.

To contact the reporter on this story:
Leah Nylen in Washington at [email protected]

To contact the editors responsible for this story:
Sara Forden at [email protected]

Jon Morgan, Magan Crane

© 2023 Bloomberg LP All rights reserved. Used with permission.

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