U.S. Moves to Bar Noncompete Agreements in Labor Contracts

In a far-reaching move that could raise wages and increase competition among businesses, the Federal Trade Commission on Thursday unveiled a rule that would block companies from limiting their employees’ ability to work for a rival.

The proposed rule would ban provisions of labor contracts known as noncompete agreements, which prevent workers from leaving for a competitor or starting a competing business for months or years after their employment, often within a certain geographic area. The agreements have applied to workers as varied as sandwich makers, hair stylists, doctors and software engineers.

Studies show that noncompetes, which appear to directly affect roughly 20 percent to 45 percent of private-sector U.S. workers, hold down pay because job switching is one of the more reliable ways of securing a raise. Many economists believe they help explain why pay for middle-income workers has stagnated in recent decades.

Other studies show that noncompetes protect established companies from start-ups, reducing competition within industries. The arrangements may also harm productivity by making it hard for companies to hire workers who best fit their needs.

The F.T.C. proposal is the latest in a series of aggressive and sometimes unorthodox moves to rein in the power of large companies under the agency’s chair, Lina Khan.

“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,” Ms. Khan said in a statement announcing the proposal. “By ending this practice, the F.T.C.’s proposed rule would promote greater dynamism, innovation and healthy competition.”

The public will be allowed to submit comments on the proposal for 60 days, at which point the agency will move to make it final. An F.T.C. document said the rule would take effect 180 days after the final version is published, but experts said that it could face legal challenges.

The State of Jobs in the United States

Economists have been surprised by recent strength in the labor market, as the Federal Reserve tries to engineer a slowdown and tame inflation.

  • Retirees: About 3.5 million people are missing from the U.S. labor force. A large number of them, roughly two million, have simply retired.
  • Switching Jobs: A hallmark of the pandemic era has been the surge in employee turnover. The wave of job-switching may be taking a toll on productivity.
  • Delivery Workers: Food app services are warning that a proposed wage increase for New York City workers could mean higher delivery costs.
  • A Self-Fulfilling Prophecy?: Employees seeking wage increases to cover their costs of living amid rising prices could set off a cycle in which fast inflation today begets fast inflation tomorrow.

The agency estimated that the rule could increase wages by nearly $300 billion a year across the economy. Evan Starr, an economist at the University of Maryland who has studied noncompetes, said that was a plausible wage increase following their elimination.

Dr. Starr said noncompetes appeared to lower wages both for workers directly covered by them and for other workers, partly by making the hiring process more costly for employers, who must spend time figuring out whom they can hire and whom they can’t.

He pointed to research showing that wages tended to be higher in states that restrict noncompetes. One study found that wages for newly hired tech workers in Hawaii increased by about 4 percent after the state banned noncompetes for those workers. In Oregon, where new noncompetes became unenforceable for low-wage workers in 2008, the change appeared to raise the wages of hourly workers by 2 to 3 percent.

While noncompetes appear to be more common among more highly paid and more educated workers, many companies have used them for low-wage hourly workers and even interns.

About half of states significantly constrain the use of noncompetes, and a small number have deemed them largely unenforceable, including California.

But even in such states, companies often include noncompetes in employment contracts, and many workers in these states report turning down job offers partly as a result of the provisions, suggesting that these state regulations may have limited effects. Many workers in those states are not necessarily aware that the provisions are unenforceable, experts say.

“Research shows that employers’ use of noncompetes to restrict workers’ mobility significantly suppresses workers’ wages — even for those not subject to noncompetes, or subject to noncompetes that are unenforceable under state law,” Elizabeth Wilkins, the director of the F.T.C.’s office of policy planning, said in a statement.

The commission’s proposal appears to address this issue by requiring employers to withdraw existing noncompetes and to inform workers that they no longer apply. The proposal would also make it illegal for an employer to enter into a noncompete with a worker or to try to do so, or to suggest that a worker is bound by a noncompete when he or she is not.

The proposal covers not just employees but independent contractors, interns, volunteers and other workers.

Lina Khan, the F.T.C. chair, has tried to use the agency’s authority to limit the power and influence of corporate giants.Credit…Graeme Sloan, via Associated Press

Defenders of noncompetes argue that employees are free to turn down a job if they want to preserve their ability to join another company, or that they can bargain for higher pay in return for accepting the restriction. Proponents also argue that noncompetes make employers more likely to invest in training and to share sensitive information with workers, which they might withhold if they feared that a worker might quickly leave.

At least one study has found that greater enforcement of noncompetes leads to an increase in job creation by start-ups, though some of its conclusions are at odds with other research.

Dr. Starr said that noncompetes did appear to encourage businesses to invest more in training, but that there was little evidence that most employees entered into them voluntarily or that they were able to bargain over them. One study found that only 10 percent of workers sought to bargain for concessions in return for signing a noncompete. About one-third became aware of the noncompete only after accepting a job offer.

In a video call with reporters on Wednesday, Ms. Khan said that she believed the F.T.C. had clear authority to issue the rule, noting that federal law empowers the agency to prohibit “unfair methods of competition.”

But Kristen Limarzi, a partner at Gibson, Dunn & Crutcher who previously served as a senior official in the antitrust division of the Justice Department, said she believed such a rule could be vulnerable to a legal challenge. Opponents would probably argue that the relevant federal statute is too vague to guide the agency in putting forth a rule banning noncompetes, she said, and that the evidence the agency has on their effects is still too limited to support a rule.

At the helm of the F.T.C. since last year, Ms. Khan has tried to use the agency’s authority in untested ways to limit the power and influence of corporate giants. In doing so, she and her allies hope to reverse a turn in recent decades toward more conservative antitrust law — a shift that they say enabled runaway concentration, limited options for consumers and squeezed small businesses.

Ms. Khan has brought lawsuits in recent months to block Meta, Facebook’s parent, from buying a virtual reality start-up and Microsoft from buying the video game publisher Activision Blizzard. Both cases employ less common legal arguments that are likely to face heavy scrutiny from courts. But Ms. Khan has indicated she is willing to lose cases if the agency ends up taking more risks.

Ms. Khan and her counterpart at the Justice Department’s antitrust division, Jonathan Kanter, have also said they want to increase the focus of the nation’s antitrust agencies on empowering workers. Last year, the Justice Department successfully blocked Penguin Random House from buying Simon & Schuster using the argument that the deal would lower compensation for authors.

One question looming over the discussion of noncompetes is what effect banning them may have on prices during a period of high inflation, given that limiting noncompetes tends to raise wages.

But the experience of the past two years, when rates of quitting and job-hopping have been unusually high, suggests that noncompetes may not currently be as big an obstacle to worker mobility as they have traditionally been. Partly as a result, banning them may not have much of a short-term impact on wages.

Instead, some economists say, the more pronounced effect of a ban may come in the intermediate and long term, once the job market softens and workers no longer have as much leverage. At that point, noncompetes could begin to weigh more heavily on job switching and wages again.

“Doing something like this is a way to help sustain the increase in worker power over last couple of years,” said Heidi Shierholz, president of the liberal Economic Policy Institute, who was chief economist at the Labor Department during the Obama administration.

David McCabe contributed reporting.

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