Changing jobs is widely considered the best way to improve your career prospects and your salary.
Sometimes non-competition clauses get in the way. These contracts are meant to protect the investments that companies have made in their businesses and employees. It is estimated that more than 30 million workers, or about 18% of the American workforce, must sign one before accepting a job.
Recently, the United States Federal Trade Commission proposed a new rule prohibiting the use of non-competition clauses in employee contracts, which suppresses wages, stifles innovation and prevents entrepreneurs from starting new businesses, the agency said.
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The proposed rule would also require companies with existing non-compete agreements to remove them and notify current and past employees that they have been revoked.
“That’s part of what makes this so radical,” said Michael Schmidt, labor and employment attorney at Cozen O’Connor in New York. Not only “the federal government is taking this action generally, but virtually without exception.”
As a result, the impact will be felt by companies whose employees are governed by non-competitions as well as companies seeking to hire workers bound by non-competitions, said Benjamin Dryden, partner at Foley & Lardner at Washington, DC, who specializes in labor and employment antitrust matters.
“This regulation will affect, more or less, every business in the country,” he said.
Non-competition clauses are increasingly used in all sectors
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“Non-competition prevents workers from freely changing jobs, depriving them of higher wages and better working conditions, and depriving companies of a pool of talent they need to build and grow,” FTC Chairwoman Lina Khan said in a statement.
In many cases, non-competitions affect white-collar workers in areas such as finance and technology, but they are increasingly being used across a wide range of industries, the FTC said, “hairstylists and warehouse workers to doctors and business executives”.
A White House and US Treasury Department report found that 15% of workers without a college degree are subject to non-compete agreements, as are 14% of workers earning less than $40,000.
A ban could raise wages by nearly $300 billion a year and reduce the pay gap between white and minority workers, as well as between men and women.
If passed, the regulations “will open up more competition between companies for workers,” said Najah Farley, senior counsel for the National Employment Law Project.
“Employers have taken advantage of the lack of laws and regulations in this area to impose these agreements on unsuspecting workers of all income levels and job titles,” Farley said.
“Non-competitions degrade wages and working conditions by eliminating one of the most effective ways workers have to improve the quality of their jobs – advocating for or moving on to better jobs.”
“When used appropriately, non-competition agreements are an important tool for fostering innovation and preserving competition,” said Sean Heather, the U.S. Chamber of Commerce’s senior vice president for regulatory affairs. international and antitrust, in a press release.
An outright ban is “patently illegal,” Heather said. “Congress has never delegated to the FTC anything close to the authority it would need to enact such a competition rule.”
There are still several steps before the proposed settlement takes effect, including the “inevitable litigation” challenging the FTC’s authority, Schmidt warned.
This rule-making process could take up to a year or more if it gets stuck in the court system, Schmidt said.
What employees should do now
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Workers who have been affected by non-competitions should submit their comments to the FTC on the proposed rule, Farley advised.
The comment period is open until March 10, and the FTC will review each submission and make changes based on those comments. “The more people who submit comments, the better,” she said.
What Employers Should Do Now
Companies should also take advantage of the FTC’s 60-day comment period and “raise their voices,” Schmidt advised.
It’s a “constructive process,” Dryden said. “If you believe this will harm your legitimate business, submit comments to the FTC explaining your thoughts.
“I wouldn’t be surprised if the FTC ends up reducing this regulation,” he added.
Still, “there was clearly a momentum towards that,” Dryden said. In fact, many states have already restricted non-competition agreements and it is no surprise that the federal government is testing a blanket ban under Section 5 of the FTC Act, which prohibits unfair methods of competition, did he declare.
“It’s too early for companies to take drastic action, but companies need to be aware that this is a real risk,” Dryden said.
For now, “use this as a reason to look, as an organization, at how you protect your business,” Schmidt advised. There may be other contracts, such as non-disclosure or non-solicitation agreements, which may achieve the same purpose.
“Even if this FTC rule ultimately doesn’t survive, state and local governments are becoming more active,” he said.
“We’re going to continue to see this trend of limitations and restrictions, whether by state legislatures or state attorneys general.”
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