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Antitrust authorities propose to ban non-competition clauses for employees

Antitrust authorities propose to ban non-competition clauses for employees
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The Federal Trade Commission on Thursday proposed a rule banning employers from imposing non-compete obligations on workers – a common practice that economists say suppresses pay, prevents new businesses from forming and raises consumer prices.

The ban would make it illegal for companies to enter into non-compete agreements with employees or to continue such agreements where they already exist, and would require companies with active non-compete clauses to inform employees that they are void. Such agreements usually prevent employees from accepting a job with a competitor of a current or former employer for a certain period of time.

The FTC estimates that banning non-compete obligations would create new job opportunities for 30 million Americans and increase wages by $300 billion a year. If enacted, the rule could send shockwaves across a wide range of industries.

That’s according to a much-cited survey of economists from 2014 nearly 20 percent of workers in the United States, non-compete obligations apply to a variety of occupations, from hairdressers to software engineers to nurses. These contracts have forced workers to take on a lot of debt during long job hunts, locked workers out of their own jobs, or pushed them into lower-paying industries.

The proposed rule recommended by President Biden as part of a Implementing Regulation 2021is the FTC’s first major attempt to expand the frontiers of antitrust enforcement to empower Americans workforce.

FTC Chair Lina Khan, a Biden-appointed person who has vowed to “use every tool in our toolbox” to curb anticompetitive behavior by companies, said the rule is being proposed because of “a body of economic evidence” that is now available show “that ways such as non-compete clauses undermine competition.”

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“Non-competitors are basically locking up workers, which means they’re not able to find the best jobs for them,” Khan said on a call with reporters Wednesday afternoon. “If this rule were finalized and enacted… [it] would force employers to compete more vigorously for workers, leading to higher wages and better working conditions and, in essence, competition in the labor market.

The proposed rule is based on an initial finding that non-competition clauses violate Section 5 of the Federal Trade Commission Act, which prohibits “unfair” practices of competition. The FTC is seek public comment to the proposed rule for 30 days, but it hasn’t announced a timeline for its approval.

Under its current Democratic majority, the FTC voted 3-1 to issue a notice of the proposed rule, the first step in its rulemaking process.

The prospect of banning non-competition clauses has met with some backlash from the business community. The US Chamber of Commerce wrote in a 2021 letter to the FTC that the agency “lacks the legal authority” to enforce such a rule, which “would harm consumers by prohibiting the many pro-competitive aspects of non-compete clauses”.

A record-breaking tight labor market, fueled by supply chain shortages and the coronavirus pandemic, has forced many companies to hike wages and improve conditions over the past year as workers have used their influence to quit and leave Changing jobs, especially in low-wage industries such as hospitality. However, workers covered by non-competition clauses did not have the same power because the labor market for such jobs was artificially restricted.

A growing body of research shows that contracts do not compete reduce wages and mobility for workers across sectors by ensuring that employers do not have to compete for employees through wage increases or improved working conditions.

The use of non-compete clauses dates back hundreds of years. Originally intended to protect a company’s trade secrets, such restrictions have become common in recent years, particularly in employment contracts – for low-wage workers, employees and managers alike – and allow companies to benefit from less competition overall.

The proposed rule would not apply to other types of employment restrictions, such as B. Non-disclosure agreements, but these provisions could be subject to rule by the FTC if the agency determines that they prevent workers from changing jobs. It would extend beyond salaried employees to include independent contractors and unpaid workers such as unpaid interns.

Some states have already outlawed non-compete agreements, including California, Oklahoma and North Dakota. Other states have banned such clauses for workers earning below a certain income. Data shows that workers in these states have faced bans larger wage increases and more professional mobility than if non-compete clauses were legal. Some observers suspect that the rise of California’s Silicon Valley as a global hub for tech innovation has been fueled by the state’s unwillingness to enforce non-compete obligations.

Yet many employers continue to require their workers to sign non-compete agreements in states where the practice is prohibited, in part because low-wage workers are unaware of their rights. A future challenge may be enforcing these rules as the FTC struggles with its own limited resources.

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Khan said she was confident the agency would be able to get businesses to follow the rule when it goes into effect.

“Companies might still be sneaking these into contracts right now and thinking, ‘Hey, these workers probably aren’t going to really know what their legal rights are,'” Khan said. “All of this would conflict with the fact that the companies would have to actively inform the employees and give them clear instructions.”

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