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President Biden is following through on a campaign promise to reduce noncompete clauses.
Biden is urging the Federal Trade Commission to ban or limit such agreements, which limit where you can work after you leave a company, as part of a broad executive order.
The action is part of the administration’s greater effort to foster competition and remove impediments to economic progress. Noncompete clauses, according to the White House, push down wages by making it more difficult for workers to transition to better-paying employment.
Traditionally, the subject has been regulated by the states.
Until now, governments have been in charge of regulating non-compete agreements. Noncompete agreements are already illegal in three states: California, North Dakota, and Oklahoma, and they are illegal in nearly a dozen more.
Lina Khan, Biden’s newly confirmed FTC Chair, has argued in favor of federal antitrust rules that include noncompete clauses, writing in a law journal in 2019 that such clauses “deter workers from switching employers, weakening workers’ credible threat of exit, and diminishing their bargaining power.”
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A broad government rule, on the other hand, would be a considerable departure and is likely to be challenged by corporations. Questions were raised during an FTC session in January 2020 over whether the agency really has the ability to enact a ban. Given the potential of legal challenges, some speculate that the FTC would take a restricted approach, prohibiting noncompete agreements just for low-wage workers rather than for everyone.
Russell Beck, a Boston attorney who has represented both employers and employees in non-compete lawsuits, says, “I think a deliberate approach would probably be the likely route.”
In the private sector, non-compete agreements are commonly used.
According to the White House, about half of private-sector enterprises utilize noncompete agreements for at least some of their employees, affecting anywhere between 36 million and 60 million people. The figures come from a poll of 634 firms conducted by the left-leaning Economic Policy Institute in 2019.
Noncompete agreements are more common in sectors dominated by low-wage workers, according to the survey, while they are more common in enterprises with well-paid, highly educated staff. Nearly a third of businesses with an average hourly income of less than $13 require all employees to sign noncompete agreements.
Noncompete agreements are used by employers even in states where they are illegal.
Companies have continued to include noncompete clauses in employment contracts even in jurisdictions where they are illegal, an issue that economist Evan Starr of the University of Maryland hopes the FTC will address.
“Rather than rendering them unenforceable, I believe the focus should be on attempting to dissuade their usage in the first place,” Starr adds.
Many workers are ignorant of state rules barring noncompetes, according to Starr’s research, therefore when faced with threatening letters from their employers, they are hesitant to dispute them.
Unlike Beck, Starr believes the FTC will issue a non-compete prohibition that will apply to the majority of workers. He claims that prohibiting them for low-wage workers is essentially uncontroversial and that there is mounting evidence that such a prohibition would also help high-skilled people.