The Federal Trade Commission proposed a rule to prohibit employers from imposing noncompete clauses on employees — a widespread practice that economists say suppresses pay, prevents new companies from forming and raises consumer prices, according to a Washington Post article.

The ban would make it illegal for companies to enter into noncompete contracts with employees or continue to maintain such contracts if they already exist, and it would require that companies with active noncompete clauses inform workers that they are void. Such agreements typically prevent workers from getting jobs at a competitor of a current or former employer for a defined period.

The FTC estimates that banning noncompete contracts would open new job opportunities for 30 million Americans and raise wages by $300 billion a year. If enacted, the rule could send shock waves across a wide range of industries.

One widely cited survey of economists from 2014 found that close to 20 percent of workers in the United States are bound to noncompete clauses across a variety of jobs, from hairstylists to software engineers to nurses. These contracts have forced workers to take on loads of debt during lengthy job searches, locked workers out of their own professions or shunted them into lower-paying industries.

A growing body of research shows that noncompete contracts reduce wages and mobility for workers across various industries by ensuring that employers do not have to compete against one another for workers by raising wages or improving working conditions.

The U.S. Chamber of Commerce contends in a letter to the FTC that reasonable non-compete clauses are pro-competitive because they protect an employer’s special investment in, training of and disclosure of sensitive business information to its employees. For these reasons, state legislatures and courts nationwide continue to protect and enforce such clauses. Moreover, in recent years, many states have adopted non-compete laws that restrict non-compete clauses in order to prevent abuses and to regulate to whom they may be applied, the circumstances in which they are appropriate, and to ensure procedural protections.

References:

1. https://www.washingtonpost.com/business/2023/01/05/ftc-noncompete-ban-lina-khan/
2. https://www.uschamber.com/assets/documents/210927_comments_noncompete_clauses_ftc.pdf