The Federal Trade Commission or FTC has proposed a new rule that would ban employers from imposing noncompetes on their employees, which harm competition in U.S. labor markets. According to the agency, the new rule could increase workers’ earnings by nearly $300 billion per year.
The proposed rule is based on a preliminary finding that noncompetes, which are generally part of labour contracts, constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.
The FTC says the often exploitative practice suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.
The companies’ noncompete clauses on their workers prevents them from joining competitors or starting a new competing business, and also prevent employers from hiring the best available talent.
The agency estimates that the new proposed rule, which will stop this practice, could increase workers’ wages significantly and expand career opportunities for about 30 million Americans.
FTC Chair Lina Khan said, “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy. 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.”
The FTC’s proposed rule would generally prohibit employers from using noncompete clauses. It will be illegal for an employer to enter into or attempt to enter into a noncompete with a worker; maintain a noncompete with a worker; or represent to a worker, under certain circumstances, that the worker is subject to a noncompete.
The rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect.
Meanwhile, the new rule would generally not apply to other types of employment restrictions, like non-disclosure agreements.
The FTC is seeking public comment on the proposed rule. Comments will be due 60 days after the Federal Register publishes the proposed rule.
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