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US Federal Trade Commission Proposes Rule Banning Employee Non-Competition Provisions

The proposed rule would prevent employers from imposing contract clauses preventing their employees from going to work for a competitor after they leave the company.

WASHINGTON. On Thursday, the Federal Trade Commission proposed a rule that would bar US employers from imposing non-compete provisions on workers. This broad measure could make it easier for people to change jobs and increase competition for labor in a wide variety of industries.

The proposed rule would prevent employers from imposing contract clauses preventing their employees from transferring to a competitor, typically for a certain period of time after they leave the company.

Proponents of the new rule argue that non-compete agreements contribute to wage stagnation, as one of the most effective ways to secure higher wages is to change companies. They argue that the articles have become so commonplace that even low-wage workers have reached out.

Opponents argue that by facilitating retention, non-competition provisions encourage companies to promote workers and invest in training, especially in tight job markets. The public has 60 days to comment on the rule before it goes into effect.

During a cabinet meeting, President Joe Biden called the FTC’s action “a huge step forward in banning non-compete agreements that are just there to cut people’s wages.”

“These agreements prevent millions of retail workers, construction workers and other workers from getting better jobs and higher wages and benefits in the same field,” Biden said.

The Federal Trade Commission has taken aggressive steps to curb the power of large corporations under the chairmanship of Lena Khan, a Washington legal scholar and outsider whose appointment by Biden marked a tough antitrust stance.

The agency estimates that the new rule could raise wages by nearly $300 billion a year and expand career opportunities for about 30 million Americans.

“Non-competition prevents workers from freely changing jobs, depriving them of higher wages and better working conditions, and depriving businesses of the talent pool they need to build and expand,” Khan said in a prepared statement.

The FTC’s proposal came against the backdrop of an already competitive job market, especially in industries that suffered massive layoffs during the first year of the COVID-19 pandemic and have since struggled to recall their workers. Many workers stay on the sidelines, seeking pay raises, coping with lingering childcare or health problems, or choosing early retirement.

“There is the potential for this to contribute to the ‘great retirement’ that everyone is talking about to one degree or another, but employers are just losing one of the tools in their toolbox and there are other ways to keep top talent,” said Vanessa Matsis. – McCready, Assistant General Counsel and Director of Human Resources, Engage PEO, which provides HR services to small and medium-sized companies. “You’ll see a lot of companies trying to keep top talent with promotions or other perks.”

Employers across the country are still hiring and layoffs are historically low despite loud claims of job cuts from companies like software provider Salesforce, Facebook parent Meta and Amazon. The government is expected to announce on Friday that employers added 200,000 jobs last month and unemployment remained at 3.7%, a nearly half-century low.

A 2019 analysis by the Liberal Economic Policy Institute found that between 36 million and 60 million workers could be subject to non-compete agreements, which the group says have been increasingly adopted by companies in recent years.

While such agreements are most common among high-paid workers, the study found that they were concluded with a significant number of low-paid workers. The study found that more than a quarter of the businesses surveyed, where the average wage is less than $13 an hour, use non-competitive rules for all of their employees.

On Wednesday, for example, the Federal Trade Commission took action against three companies for illegally imposing noncompete provisions on workers, including low-paid security guards, who faced a $100,000 fine if they breached the agreement.

An EPI study found that many companies still use non-compete clauses in several states that already ban or restrict them, including California, which has banned the practice for a century.

The proposed FTC rule would require companies to drop existing reasons for non-competition and proactively inform workers that they are no longer in effect, as well as prohibit the introduction of new ones.

The proposal is based on the preliminary finding that the non-competition provisions preclude competition in violation of Section 5 of the Federal Trade Commission Act. This generally does not apply to other types of employment restrictions, such as non-disclosure agreements.

But Emily Dickens, chief of staff and head of public relations for the Society for Human Resource Management, said the proposed FTC rule is too broad and could potentially hurt businesses that depend on them to thrive. She mentioned very small emerging industries where important know-how cannot be protected by non-disclosure agreements alone.

Dickens said the SHRM, a group of more than 300,000 human resources professionals and executives worldwide, will encourage its members to submit specific situations that could warrant non-compete clauses during the FTC’s comment period.

Although “there are jobs where it makes no sense not to compete,” said Dickens, “such a complete ban would stifle innovation.”

While advocates of non-compete provisions argue that they help startups and small businesses retain talent, opponents say they hinder hiring within the same organizations.

The Economic Innovation Group, a Washington-based public policy research group, welcomed the rule and called on Congress to pass a proposed law that would impose a similar ban for a more permanent period.

“Limiting the use of non-compete agreements is a fundamentally good policy that will raise wages, improve labor mobility, and encourage entrepreneurship and innovation throughout the economy,” said John Lettieri, EIG President and CEO.

Associated Press contributors Chris Rugaber and Nancy Benac of Washington contributed to this report.

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