FTC moves to ban noncompete agreements

The Federal Trade Commission proposed a rule that could lift wages by nearly $300 billion per year economywide by blocking companies from limiting their workers' ability to work for a competitor, The New York Times reported Jan. 5.

The rule would ban noncompete agreements, which prevent employees from leaving for a rival or starting a competing business for a certain amount of time after their employment ends. They are often applied to physicians but appear to suppress pay or otherwise directly affect between about 20 percent to 45 percent of workers in the private sector, the report said.

"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," FTC Chair Lina Khan said. "By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation and healthy competition."

Noncompete agreements have also been floated as possible contributors for middle-income wage stagnation, the report said. They may also reduce competition and hurt productivity by making it harder for companies to hire the best workers.

About half of states strictly limit noncompete agreements, and some consider them largely unenforceable, the report said. But even in those states, companies often still use such agreements. Many workers are likely unaware those documents might be unenforceable, the report said.

The proposed rule would force companies to withdraw existing noncompetes and tell their employees they no longer apply. It would also make it illegal for a company to try to enter into a noncompete agreement or to falsely suggest a worker is bound by one, the report said.

Wage increases can make inflation worse, but some evidence from the labor market since 2020 suggests banning noncompetes may not cause much of a short-term wage spike, the report said. Wages should go up in the long term, however, should the rule take effect.

"Doing something like this is a way to help sustain the increase in worker power over the last couple of years," Heidi Shierholz, PhD, president of the liberal Economic Policy Institute and chief economist with the Labor Department during the Obama administration, told The New York Times.

Noncompete proponents argue workers can freely turn down jobs that limit their ability to move to another company, or that they can negotiate for higher pay or other concessions in exchange for agreeing to the restriction, the report said. Noncompete agreements also appear to incentivize businesses to invest more in training, proponents say.

The proposal will be open 60 days for public comments, and the FTC will then move to make it final, the report said. The rule would take effect 180 days after the final version is published, barring legal challenges.

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