A Controversial Proposal: No More Non-Competes
Today, the Federal Trade Commission (FTC) rolled out a game-changing proposal designed to banish non-compete agreements from corporate hiring practices. If implemented, companies will also be required to rescind existing non-compete clauses. Notably, companies located in states where non-competes are already unlawful, like California, would be prohibited from hinting at the existence of such clauses. The proposal may also implicate non-disclosure agreements if they’re deemed too broadly defined to resemble a non-compete.
The FTC justifies its bold move as a vital part of the Biden administration’s strategy to enhance competition by wielding antitrust and unfair practice laws. The commission rests its authority for the proposed rule on Section 5 of the Federal Trade Commission Act, which empowers the FTC to combat unfair competition methods.
“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” FTC Chair Lina Khan commented. “By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
Behind the Scenes: The Cost of Non-Competes
According to the FTC, non-compete agreements are causing workers an annual loss of nearly $300 billion in income by preventing them from capitalizing on their skills with better offers from other employers. The impact of these agreements extends even to workers not directly subjected to non-competes due to their wage suppressing effects.
Elizabeth Wilkins, director of FTC policy planning, stated, “The proposed rule would ensure that employers can’t exploit their outsized bargaining power to limit workers’ opportunities and stifle competition.”
It’s estimated that around one-quarter of workers are bound by such agreements. Over the last ten years, employers have been increasingly leveraging these agreements, extending them to lower-paid workers who traditionally were not subject to non-competes, given their lack of access to sensitive information or a significant client base.
McDonald’s franchises have been in the limelight for enforcing these agreements on low-wage workers, sparking a series of state laws and more rigorous federal enforcement via the FTC and the Department of Justice.
An Uphill Battle: Legal Challenges Loom
Legal experts predict a legal pushback if the FTC proceeds with finalizing the rule. Questions have been raised about the FTC’s authority under Section 5 of the FTC Act to enforce such a narrowly focused rule.
The commission is already bracing for legal resistance regarding its escalating reliance on Section 5 for individual enforcement actions against companies.
Legal expert Dennis Cuneo of Fisher Phillips noted, “The fact that a federal agency is coming in and using Sec. 5 of the FTC Act, saying these things could be illegal, means … cases will be litigated … to see if the FTC indeed has the authority.”
Christine Wilson, the only FTC commissioner to oppose the proposed rule, voiced concerns about the rule breaking with tradition, lacking adequate data to justify the claim that non-compete agreements harm competition, and potentially being vulnerable to a legal challenge under Section 5.
Wilson argued, “I am dubious that three unelected technocrats have somehow hit upon the right way to think about non-competes, and that all the preceding legal minds to examine this issue have gotten it wrong.”
The FTC is inviting public comment for 60 days, after which the received feedback will be taken into account in the final rule.
FTC Chair Khan expressed hopes to receive suggestions regarding whether a distinction should be drawn between higher-income employees, who are traditional targets of non-competes, and lower-wage workers.
She asserted, “Senior executives or other highly paid workers … may be less vulnerable to coercion, but restraining them through non-competes may still harm competition.”
