Written by Founding Partner Allan Rooney
In a move that would be tremendous for workers in the US, the Federal Trade Commission (FTC) is aiming to establish a rule that would stop employers from being able to force workers to sign non-compete clauses. These clauses are a widespread practice that some economists say suppresses pay, prevents new companies from forming, and raises consumer prices. If successful, the FTC estimates that the rule could “increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.”
In a statement, FTC Chair Lina M. Khan said, “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy. Non-competes 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. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
The FTC is currently in a 60-day public comment period on the proposed rule based on the tenet that non-competes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act. The rule would make it illegal for companies to enter non-compete contracts with employees or maintain existing contracts. The rule would also apply to independent contractors and “anyone who works for an employer, whether paid or unpaid,” according to the agency’s press release.
In an article published by Reuters, FTC Commissioner Rebecca Slaughter said in 2020 that surveys have estimated that 16% to 18% of all US workers are subject to non-compete provisions. Meanwhile, nearly 10% of American workers surveyed in 2020 were covered by a training repayment agreement, said the Cornell Survey Research Institute.
On the other side of the fence, FTC Commissioner Christine S. Wilson issued a statement dissenting against the agency’s move, calling the proposed rule “a radical departure from hundreds of years of legal precedent.” She argues that the FTC does not have the evidence to back its claim that non-competes harm competition and that the rule will likely be challenged and potentially overturned in court.
The US Chamber of Commerce issued a statement calling the potential new rule “blatantly unlawful.” It went on to say that “attempting to ban noncompete clauses in all employment circumstances overturns well-established state laws which have long governed their use and ignores the fact that, when appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition.”
Our Take
There is still much discussion to be had over the comment period before the proposed new rule comes into effect. If successful, it would represent a victory for employees, allowing more freedom to build their careers and increase their income and perhaps improve the competitive landscape for new companies and existing companies looking to grow.
However, we expect legal challenges to the rule at the state level as they have governed their own laws in this area. Such a change would be nothing short of seismic to the employment landscape and, should it hold, a decrease of sometimes oppressive litigation where the party with the larger wallet can win out over justice to the individual – litigation has become so expensive that many matters may never see a courtroom. That said, corporate interests cannot be discarded (states usually balance the two sides), and much would still be achievable with “non-solicitation” restrictions and perhaps a law on confidentiality and trade secrets. Watch this space, and let’s see if it gets through the comments stage.
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