FTC weighs restricting noncompete agreements to boost worker job prospects

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The Federal Trade Commission is considering restricting the use of “noncompete” clauses in contracts that attempt to stop workers from switching jobs within the same industry, a policy meant to help low-income earners take higher-paying work.

Three of the five commissioners at the agency have expressed concern regarding noncompete agreements, with some wanting the commission to issue a rule immediately to limit the clauses.

“I strongly support the FTC undertaking such an endeavor,” FTC Democratic Commissioner Rebecca Kelly Slaughter said at a commission event Thursday on noncompetes in the workplace. “We need not wait for legislation to tackle this head-on.”

A rule restricting the use of noncompetes could have widespread implications, since approximately 1 in 5 workers today is bound by such contractual terms, particularly in the healthcare and tech sectors. Many states, such as California, North Dakota, and Oklahoma, already ban noncompetes, and many others, including Hawaii, Illinois, Maryland, New Hampshire, Oregon, and Washington, have passed laws limiting their use, particularly among low-wage workers.

A study on Oregon’s hourly paid workers after the state banned noncompetes suggested that such a policy would provide a significant pay raise to low-income earners.

“The average worker would be better off if they banned non-competes. This is widely agreed upon by everyone, on both sides of the aisle, Democrats and Republicans,” said Evan Starr, a professor of management and organization at the University of Maryland. Starr was invited to speak at the FTC last week during its “Noncompetes in the Workplace” event.

The issue first gained attention in 2014 when an investigation was opened into sandwich chain Jimmy John’s use of noncompete agreements at its franchises in New York. Its contract prevented employees from taking jobs with Jimmy John’s competitors for two years after leaving the company and stopped them from working within two miles of a Jimmy John’s store. The practice was ultimately deemed illegal by the New York attorney general’s office, and the chain agreed to stop including noncompete agreements in its hiring documents.

In 2018, a number of fast food chains, including Arby’s, Carl’s Jr., McDonald’s, Jimmy John’s, Auntie Anne’s, Buffalo Wild Wings, and Cinnabon, made similar pledges to stop using noncompetes following an inquiry by a coalition of state attorneys general.

“Noncompetes have expanded in recent years, and they are empirically known to reduce labor market competition, suppress mobility, and decrease wages,” said Orly Lobel, a law professor at the University of San Diego who researches labor and noncompetes.

“Moreover, they have a disproportionate harmful effect on women and racial minorities,” said Lobel, who was also invited to speak at the FTC event on noncompetes last week.

Corporations argue that noncompetes are there to protect a company’s investments in worker training and curb the loss of trade secrets and proprietary information. Critics, though, argue their main purpose is actually to hold wages down by limiting workers’ ability to sell their skills to the highest bidder.

Still, there is a major reason for the FTC not to pass a rule restricting noncompete clauses: Congress has not weighed in and given it the green light to do so yet.

“This is a real issue,” Republican Commissioner Noah Phillips said, speaking at the FTC event last week.

He added that “the fact that neither the FTC nor any court has found noncompetes to violate the FTC’s prohibition against unfair methods of competition, and the lack of a good historical precedent, all of that concerns me.”

President Barack Obama took aim at noncompetes in a 2016 executive order, saying they “narrow the employment options for an estimated one in five workers in the United States.” The Trump administration hasn’t shown a similar interest in the issue.

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