NYT (“U.S. Moves to Bar Noncompete Agreements in Labor Contracts“):
In a far-reaching move that could raise wages and increase competition among businesses, the Federal Trade Commission on Thursday unveiled a rule that would block companies from limiting their employees’ ability to work for a rival.
The proposed rule would ban provisions of labor contracts known as noncompete agreements, which prevent workers from leaving for a competitor or starting a competing business for months or years after their employment, often within a certain geographic area. The agreements have applied to workers as varied as sandwich makers, hairstylists, doctors and software engineers.
Studies show that noncompetes, which appear to directly affect roughly 20 percent to 45 percent of U.S. workers in the private sector, hold down pay because job switching is one of the more reliable ways of securing a raise. Many economists believe they help explain why pay for middle-income workers has stagnated in recent decades.
Other studies show that noncompetes protect established companies from start-ups, reducing competition within industries. The arrangements may also harm productivity by making it hard for companies to hire workers who best fit their needs.
The F.T.C. proposal is the latest in a series of aggressive and sometimes unorthodox moves to rein in the power of large companies under the agency’s chair, Lina Khan.
President Biden hailed the proposal on Thursday, saying that noncompete clauses “are designed simply to lower people’s wages.”
“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,” he said at a cabinet meeting.
WaPo (“Antitrust regulators propose banning noncompete clauses for workers“):
The Federal Trade Commission proposed a rule Thursday to prohibit employers from imposing noncompete clauses on workers — a widespread practice that economists say suppresses pay, prevents new companies from forming and raises consumer prices.
The ban would make it illegal for companies to enter into noncompete contracts with employees or continue to maintain such contracts if they already exist, and it would require that companies with active noncompete clauses inform workers that they are void. Such agreements typically prevent workers from getting jobs at a competitor of a current or former employer for a defined period.
The FTC estimates that banning noncompete contracts would open new job opportunities for 30 million Americans and raise wages by $300 billion a year. If enacted, the rule could send shock waves across a wide range of industries.
One widely cited survey of economists from 2014 found that close to 20 percent of workers in the United States are bound to noncompete clauses across a variety of jobs, from hairstylists to software engineers to nurses. These contracts have forced workers to take on loads of debt during lengthy job searches, locked workers out of their own professions or shunted them into lower-paying industries.
WSJ (“FTC Proposes Banning Noncompete Clauses for Workers“) adds:
If the FTC eventually votes to adopt the proposal, companies would have to rescind noncompete requirements they impose on workers and let employees know about the change. FTC officials say noncompetes suppress wages, restrain new business formation and hurt the ability of companies to hire workers they need to grow.
“Noncompetes are basically locking up workers, which means they are not able to match with the best jobs,” Chair Lina Khan said on a call with reporters Wednesday. “This is bad for competition. It is bad for business dynamism. It is bad for innovation.”
The four-member commission voted 3-1 last month to issue the proposal, which is subject to a 60-day period of public comment before it can be adopted as a regulation. Republican Commissioner Christine Wilson voted against the plan, writing in a dissent that the FTC has gathered only scant evidence to support a complete ban on noncompete agreements.
The proposal was expected by business groups, which sometimes say noncompetes have beneficial effects, such as safeguarding confidential customer data and intellectual property. Ms. Khan said in an interview with The Wall Street Journal in June that it was an urgent task for the FTC to rein in the growth of noncompete agreements.
The U.S. Chamber of Commerce said Thursday it is weighing a lawsuit over the proposal if it is adopted. “We don’t believe they have the statutory authority,” said Sean Heather, the Chamber’s senior vice president for international regulatory affairs and antitrust issues. “They know they are on very tenuous ground.”
I don’t have the expertise in labor law to evaluate that claim but suspect that the Chamber is right. Further, the Supreme Court has lately treated the Congressional delegation of rulemaking both narrowly and skeptically.
From a pure public policy standpoint, though, this seems like a positive step. While limited non-competes for high-level employees—and especially the protection of legitimate trade secrets—are reasonable, noncompetes are often used in obviously abusive and exploitative ways. As Sara Morrison and Rani Molla note at Vox,
A 2014 survey of economists found that nearly 20 percent of workers have noncompete clauses in their contracts. That number is more likely 50 percent for people in high-skilled and high-tech jobs, according to Matt Marx, a professor at Cornell University’s economics and management school, who has been studying noncompete agreements for 15 years.
“I signed my first noncompete in 1995 and didn’t realize what I was doing — and that’s the case for many if not most workers,” he said.
Marx added that these agreements don’t just specify that you can’t share a specific company’s secrets, but are often interpreted more broadly so that a person can’t use skills they had prior to working at that company — something he said can be debilitating to high-skilled workers and entrepreneurs.
One person Marx interviewed, a woman with a PhD in speech recognition who had worked at Bell Labs for nearly two decades, said she had to get a “random computer programming” job outside her field after working for 18 months at a startup where she’d signed a noncompete agreement.
“You’ve been working in this industry for 20 years? Oh, well, sorry, you can’t do that anymore because you worked for us for two years,” Marx explained. “Tough luck, you have to find something else to do.”
Detractors of noncompete clauses say the agreements prohibit workers from getting jobs with competitors or even within the same industry. In doing so, they restrict job mobility and prevent workers from being able to push for higher wages, since changing jobs is often how workers get higher pay. These clauses can send them on lengthy job searches or even “career detours.”
Again, I think firms ought to be able to protect legitimate trade secrets, intellectual property, and the like. But workers should obviously have a right to work at other firms in the same general industry.
