On Jan. 5, the Federal Trade Commission (FTC) proposed a rule that would prohibit employers from imposing noncompete clauses on their workers, as well as nullify noncompete clauses currently in effect.
Noncompete clauses prevent workers from joining rival businesses, generally within a specific geographic area or time span. Once rare and limited to top management, they now govern the actions of some 30 million people, or about one in five workers, according to the FTC. Critics say they are often tucked into contracts without workers realizing they have signed away their ability to make a living.
The proposed rule—which has not yet been fully approved, may be modified, and will likely be subject to legal challenge—bans noncompete agreements outright, with only one exception: When there’s the sale of a business, workers with a greater than 25% ownership of the old company can be banned from competing.
Sara Yood, deputy general counsel for the Jewelers Vigilance Committee (JVC), says she believes that “more than a few businesses in the jewelry industry” use these clauses.
“The proposed rule is obviously very worker-friendly: The data the FTC references shows that noncompete clauses drive down wages and innovation,” she adds. “In an already challenging labor market, this will make employees better positioned to look for alternate employment. Businesses who may lose the ‘protection’ of noncompetes should look into alternate retention methods and ensure their workforce has access to a competitive benefits package.”
She notes that some businesses use noncompetes as a form of “de facto intellectual property protection”—which she wouldn’t recommend. She suggests that people interested in protecting valuable business information should try more narrowly crafted alternatives, including trade secret law or copyright and trademark protection.
Other options include non-solicitation clauses—where a worker agrees not to solicit a company’s client or customers—and nondisclosure agreements.
In a New York Times editorial promoting the change, FTC Commissioner Lina Kahn argued that the current situation restricts workers’ economic liberty. The FTC estimates that workers’ wages would increase $300 billion a year if the rule is passed.
Sean Heather, U.S. Chamber of Commerce senior vice president for international regulatory affairs and antitrust, called the rule change “blatantly unlawful” and said his group plans to challenge it.
“When appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition,” he said.
Several states, including California, already have statues banning or limiting noncompetes. The American Bar Association has said it’s unethical for firms to impose them on lawyers—who, ironically, are often the people who draft and enforce these clauses.
The FTC has opened the rule for public comment. Anyone who wishes to comment can do so here.
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