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What the proposed ban on non-compete clauses means for you

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FTC proposes new rule to ban non-compete clauses

Job switching is widely considered the best way to improve your career prospects and pay.

Sometimes non-compete clauses get in the way. These contracts are designed 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 US workforce – are required to sign one before accepting a job.

Recently, the US Federal Trade Commission proposed a new rule prohibiting the use of non-compete clauses in employment contracts, which suppress wages, hinder innovation and prevent 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 eliminate them and inform current and former employees that they have been terminated.

“That’s part of what makes this so radical,” said Michael Schmidt, employment attorney at Cozen O’Connor in New York. Not only “the federal government is taking this action widely but virtually without exception.”

As a result, the impact will be felt by companies with non-competing employees, as well as companies looking to hire non-competing employees, said Benjamin Dryden, a partner at Foley & Lardner in Washington, DC, who specializes in antitrust issues related to labor and to employment.

“This regulation will affect, more or less, all businesses in the country,” he said.

Non-competitors are increasingly used in all industries

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“Uncompetitive ones prevent workers from changing jobs freely, depriving them of higher wages and better working conditions and depriving companies of a pool of talent they need to build and expand,” said FTC Chair Lina Khan. in a statement.

In many cases, non-competitors affect white-collar workers in areas such as finance and technology, but they are increasingly used across a wide range of industries, the FTC said, “from hairdressers and warehouse workers to doctors and Business”.

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, this regulation “will open up more competition between companies for workers,” said Najah Farley, senior attorney with the National Employment Law Project.

Uncompetitive degrade wages and working conditions, eliminating one of the most effective means workers have to improve the quality of their work – defending or moving to a better job.

Najah Farley

senior lawyer at the National Labor Law Project

“Employers have taken advantage of the lack of laws and regulations in this area to impose these deals on unsuspecting workers at all income levels and job titles,” Farley said.

“Uncompetitive degrades wages and working conditions, eliminating one of the most effective means workers have to improve the quality of their work – defending or moving to a better job,” she said.

“When used properly, non-compete agreements are an important tool for fostering innovation and preserving competition,” said Sean Heather, senior vice president of the U.S. Chamber of Commerce for International Regulatory Affairs and Antitrust, in a statement. .

A total ban is “clearly illegal,” Heather said. “Congress has never delegated to the FTC anything approaching the authority necessary to enact such a competition rule.”

There are still several steps before the proposed regulation takes effect, including “inevitable litigation” that challenges the FTC’s authority, warned labor and employment attorney Schmidt.

That regulatory process can take up to a year, or even longer if it gets stuck in the court system, Schmidt said.

What Should Employees Do Now?

Thomas Barwick | Getty Images

Workers who have been affected by non-competition should submit comments to the FTC on the proposed rule, Farley advised.

The comment period is open through March 10, and the FTC will review each submission and make changes based on that feedback.

“The more people 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 “let their voices be heard,” Schmidt advised.

This should be a “constructive process,” Dryden said. “If you feel this will harm your legitimate business, please send comments to the FTC explaining your thoughts.”

“I wouldn’t be surprised if the FTC ends up reducing that regulation,” he added.

Still, “there was clearly momentum towards this,” Dryden said. In fact, many states already have limitations on non-compete agreements, and it’s no surprise that the federal government is testing a blanket ban under Section 5 of the FTC Act, which prohibits unfair methods of competition, he said.

“It’s too early for companies to take drastic action, but companies should be aware that it’s a real risk,” Dryden said.

For now, “use this as a reason to look as an organization at how you’re protecting your business,” Schmidt advised. There may be other agreements, such as non-disclosure or non-solicitation agreements, that can achieve the same objective.

“Even if this FTC rule 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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