The Federal Trade Commission issued a major proposal Thursday that would bar employers from using noncompete agreements to lock workers into their jobs and keep wages down.
Employees who sign noncompetes are forbidden from taking a job at a competing company for a certain period of time. The FTC said the agreements create an “unfair method of competition” for workers and therefore violate federal law.
Lina M. Khan, the commission’s chair, said in a statement that the freedom to jump ship to a different employer was at the “core” of economic liberty.
“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,” Khan said.
The agency estimates that a ban could increase wages for U.S. workers by as much as $296 billion per year.
The commission’s members voted 3-1 in favor of pursuing the rule, which must go through a public comment period before it’s finalized. It could later change shape or be challenged in court.
Policymakers ― primarily Democrats ― have criticized the use of noncompetes for several years, noting they can rob workers of the higher wages they would earn in a free labor market. Once confined to high-earning fields like computer engineering, the clauses appeared to proliferate in recent decades, even impacting low-wage fields like fast food.
President Joe Biden urged the FTC to take action on noncompete agreements early in his term, issuing an executive order in July of 2021 saying they “unfairly limit worker mobility.” Khan is widely considered one of the most progressive appointments Biden has made, and her agenda at the FTC could turn out to be a significant piece of the president’s legacy.
“[T]hese aren’t just high-paid executives or scientists who hold secret formulas for Coca-Cola so Pepsi can’t get their hands on it,” Biden said at the time. “They’re construction workers, hotel workers, disproportionately women and women of color.”
Though it’s difficult to know exactly how many workers are affected by the clauses, the Economic Policy Institute, a left-leaning think tank, estimates that between 36 and 60 million workers are subject to them. The FTC puts the number around 30 million.
Even when employers do not try to legally enforce noncompetes, the clauses can still have their desired effect by discouraging workers from seeking jobs elsewhere. Many would rather not find out if their employer would try to take them to court.
An employer might find noncompetes especially useful in a tight labor market like the current one. Companies are facing increased competition for workers, requiring them to raise pay in many fields in order to retain talent. The use of noncompetes could help them keep employees at their current pay rates.
The more ridiculous uses of noncompete agreements have helped spur a backlash against them. For instance, HuffPost reported in 2015 that noncompete agreements were being used by franchisees of the Jimmy John’s sandwich chain.
The clause barred employees from taking jobs at a competing sandwich shop within two years of working at a Jimmy John’s location. A competitor was defined as a shop that makes “submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches” within three miles of a Jimmy John’s. The FTC cited the Jimmy John’s case in its proposed rule.
The agency said the rule would also extend to cover “de facto” noncompetes that aren’t framed as traditional noncompete clauses. An example would be a worker who’s required to pay thousands of dollars in training fees if they want to quit their job. In such a scenario, a worker may feel unable to leave their job because of potential debt.
Employers would be required to comply with the new rule within six months of it going into effect, the FTC said. Companies that already have noncompetes in place would be required to rescind them and notify workers that they would no longer be held to them.
Before issuing its proposed rule, the FTC announced on Wednesday that it was taking legal action against three companies for what it called the illegal use of noncompetes. The agency said the clauses kept wages down for manufacturing workers, engineers and low-wage security guards by preventing them from pursuing jobs elsewhere.