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Feds might make noncompete clauses illegal – what to do next

Noncompete clauses have a tricky history, but the FTC has proposed they be nixed altogether.

Employee typing representing the marketer life

In a completely unprecedented move, the Federal Trade Commission issued a proposal last week that would abolish noncompete agreements across the country, preventing employers from forcing their employees to stay with their current company – a restriction that, according to antitrust analysis, stifles healthy market competition and curbs employee wage caps. 

Should the proposal pass, any noncompete agreements currently in effect would effectively cease as well, allowing employees heretofore bound by their terms to pursue employment at rival firms or start their own competing businesses.

Noncompete agreements comprise, in the FTC’s own words, an “unfair method of competition” that actually wreaks more economic damage – including steadily climbing consumer prices, something that hits especially hard during a year marked by record-breaking inflation. Lina Khan, current chair of the FTC, is all in on the proposal as a meaningful fix rather than a simple patch for this problem.

“Basically, in short, there’s a whole raft of economic evidence that now documents the ways in which these noncompete clauses undermine competition and competitive conditions,” Khan explained. 

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“[A noncompete ban] would force employers to compete more vigorously over workers in ways that should lead to higher wages and improved working conditions, basically injecting competition into the labor market,” she added in a separate conference with reporters.

An investigation by the Treasury Department found that “wages are 15% to 20% lower currently than they would be in a perfectly competitive labor market,” and noncompetes are largely to blame. Ideally, a wholesale ban would restore a form of balance to the market.

Indeed, some states have already banned noncompetes in various forms. California, Oklahoma, and North Dakota have flat-out bans across the board, while other states have conditional bans designed to protect employees below a certain income level. Washington Post notes that “workers in these states with bans have seen larger wage increases and more job mobility than when noncompete clauses were legal.”

But that same report found that the ban has not stopped employers in these states from requesting that employees sign non compete agreements anyway, citing a common lack of awareness of labor rights among low-income employees.

Khan doesn’t anticipate that this disparity in awareness will harm the intentions behind the proposal. “Companies right now might still be sneaking these into contracts, thinking, ‘Hey, these workers are unlikely to actually know what their legal rights are… All of that would be precluded by the fact that firms would actively have to inform the employees and give them clear notice,” she said.

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The FTC will reportedly host a 60-day public forum during which people can lodge complaints or observations that may affect the final draft of the rule. If put into place, the rule would require employers to pull their noncompete agreements within six months of the ruling, and employers would need to inform employees that they were doing so.

At this point, employees should understand that their horizons could ostensibly be about to brighten for the better. Noncompetes have clearly limited employee upward mobility, and – as President Biden pointed out in his related 2021 executive order – they have affected “disproportionately women and women of color” in addition to employee bases that are often inherently exploited. A successful implementation of this rule would represent a fresh start.

Employers who still use noncompete agreements, by contrast, have a couple of hurdles to cross.

Firstly, affected employers should start preparing for the possibility of a mass-phaseout of noncompete agreements, making sure to coordinate with the appropriate HR representatives and maintaining transparency with employees along the way. Popular concerns that some companies will attempt to quietly invoke or hold onto their noncompetes are valid, and the FTC is sure to spend a lot of time scrutinizing anyone and everyone who does anything less than above-board.

Secondly – and equally as importantly – employers should either be prepared to match competitor salaries and benefits once their noncompetes are no longer valid, or be prepared to face an employee exodus that is, by expert analysis, not only in their best interests, but in the best interests of the economy.

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Jack Lloyd has a BA in Creative Writing from Forest Grove's Pacific University; he spends his writing days using his degree to pursue semicolons, freelance writing and editing, oxford commas, and enough coffee to kill a bear. His infatuation with rain is matched only by his dry sense of humor.

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