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Jan 11, 2023

Last week, the Federal Trade Commission (FTC) issued a proposal to ban noncompete agreements. Should the proposal turn into law, it would create a seismic shift in how many employers do business.

The FTC points out that 1 in 5 Americans (about 30 million people) are restricted from pursuing better employment due to noncompete clauses. In turn, the agency points out, this dampens wages — not just for individuals who are subject to such terms but for all workers. Furthermore, the FTC adds that noncompete agreements hinder innovation and prevent new businesses from forming.

“This proposal should come as a shock to no one,” says employment attorney Kate Bischoff. Back in July 2021, President Biden issued an executive order that supported the FTC in addressing noncompete clauses, or what the White House deemed “regulations that create unnecessary barriers to entry that stifle competition.” 

Over a year later, the FTC isn’t looking merely to limit the scope of noncompetes. Rather, its current aim is to abolish them completely (with sole exceptions applying to sales of businesses). According to the FTC, this would increase Americans’ earnings by up to $296 billion annually.

Workers Untethered

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC Chair Lina M. Khan in a press statement. “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. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

And save workers from toxic environments. “Eliminating noncompetes is a good thing for people who might otherwise feel trapped in hostile situations at their organizations,” says Mary Faulker, a principal at IA-HR and ERE’s strategy columnist. “People should feel free to leave without fear that the company will retaliate by enforcing a noncompete clause. Such agreements can be, and are, used as a bullying and fear tactic at many organizations.”

Just ask Charlotte Newman. In her recent Fast Company article, “Why I Sued Amazon and Decided to Keep Working There,” Newman, a global business development leader at the retail giant, writes about the discrimination, harassment, and sexual assault she says she faced at work. 

Newman reveals how she “felt trapped by Amazon’s expansive noncompete. After reporting the sexual assault and harassment, I asked to have the noncompete removed and was told no. So ultimately I created my own position in another business unit to avoid the risk of being sued by Amazon for violating the noncompete agreement that I remain under and to protect myself from retaliation.”

A Sweeping Statute

While numerous states and localities already have laws governing noncompete agreements, the FTC’s would supersede — and in practical terms — go well beyond most existing statutes. 

For example, the federal government’s version would be retroactive, thereby rescinding all existing noncompete clauses. It also would prohibit employers from forcing workers to repay them for training costs when such payments are not reasonably related to the costs that employers incurred for the training itself.

Meanwhile, only a day before the agency announced its sweeping proposal, it took legal action against three employers and two individuals by forcing them to eliminate noncompete restrictions. It’s the first time ever that the FTC has sued to stop noncompete restrictions. 

One case involves Prudential Security and Prudential Command, two affiliated Michigan companies, which the FTC says exploited their superior bargaining power. Prudential required security guards, many of whom earn at or close to minimum wage, to sign noncompetes that prohibited them from working for a competitor within 100 miles for two years after leaving the organization. Moreover, even after a Michigan court invalidated Prudential’s noncompete clause, the employer continued requiring that its guards agree to it.

The End of the Noncompete?

It’s worth pointing out that the FTC stipulates that the new proposal would not cover commonly related employment agreements, such as nondisclosure, non-disparaging, and non-solicitation agreements. 

“But the reason that many employers prefer noncompetition agreements to those other agreements,” Bischoff explains, “is because they are easier to prove. It’s easier for an employer to control things with a noncompete.”

As to whether the proposal becomes law and what that legislation might ultimately look like, Bischoff anticipates that the final version will not be as broad, eventually limited to workers earning low wages. She also cautions that “it may be a long time before we get real resolution on this. Whatever becomes law will likely be challenged in the courts, perhaps even knocked down in the Fifth Circuit before it eventually goes to the Supreme Court.”

In the meantime, as is customary before such a proposal can become policy, the agency is giving the public an opportunity to submit opinions (by March 10). For now, Bischoff instructs, the takeaway for employers is clear: “Noncompetes do not have a long shelf life in the United States. If you are still relying heavily on them, it’s time to reevaluate what you’re doing.”

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