On Thursday, the Federal Trade Commission proposed a ban on noncompete agreements. These agreements are used to stop employees from working at a competing company or starting their own competing company within a period of time after leaving, often in a certain geographic area.
The move comes more than a year after President Joe Biden signed an executive order urging the FTC to impose limits on or ban completely noncompete agreements in labor contracts.
Under this new rule employers could not ask new employees to sign noncompetes and would have to rescind current ones, per Business Insider. The rule would also apply to independent contractors and volunteers.
Who is affected by a noncompete agreement ban?
The FTC estimates that 1 in 5 workers would be affected by this ban, which predicts could result in $300 billion more in earned wages, per Axios.
Though noncompetes were originally meant for high-level employees, they are often implemented at every level, including at the retail level, at many companies.
According to a 2019 study by the Economic Policy Institute, 31.8% of businesses that responded to the survey had noncompetes in place for all of their employees, no matter their responsibilities or pay level.
Famously, noncompetes have been used by the sandwich chain Jimmy Johns in Illinois, where it banned workers from leaving to work at another business that made 10%+ of its revenue from selling specified types of sandwiches.
According to Business Insider, Jimmy Johns settled and halted this ban in 2016.
In a cabinet meeting, Biden said, “These agreements block millions of retail workers, construction workers and other working folks from taking a better job, getting better pay and benefits, in the same field,” per The New York Times.
What do noncompete clauses do?
Noncompetes allow employers to maintain what economists call monopsony power, which is when employers have a larger say in setting wages, compared to perfect competition, which dictates that a company acts according to the market.
According to Business Insider, a Treasury Department report found that in a perfectly competitive market, wages would be 15%-20% higher than they were as of March 2022.
An opponent to the ban, a senior vice president at the U.S. Chamber of Commerce Sean Heather, said in a statement, “(a ban) ignores the fact that, when appropriately used, noncompete agreements are an important tool in fostering innovation,” per the New York Times.
Michael R. Strain, an economist at the American Enterprise Institute, claimed that the ban makes less sense for higher level employees.
He argued, “If your job is to make minor tweaks to the formula for Coca-Cola and you’re one of 25 people on earth who knows the formula it makes total sense that Coca-Cola might say, ‘We don’t want you to go work for Pepsi.’”
FTC chair Lina Khan, defended the proposal in a statement, saying, “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” per Axios.
The public now has 60 days during which they are able to comment on the proposal. After the comment period, the rule will either take effect or be struck down.