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FTC Proposes Ban of Non-compete Clauses

The Federal Trade Commission proposed a new rule on January 5, 2023 to ban the use of non-compete clauses in worker contracts.

Non-compete clauses — legal stipulations that prevent workers from going to work for or starting a competing business within a certain time period after leaving a job — are used in a variety of industries and job levels. Their use has grown in recent years, and many economists believe they are a significant factor contributing to stagnating wages.

The proposal is based on the FTC’s finding that non-compete clauses violate its fair trade laws, with the agency calling them a “widespread and often exploitative practice that suppresses wages, hampers innovation and blocks entrepreneurs from starting new businesses.”

The FTC estimates that the new rule could increase wages by some $300 billion a year.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” FTC Chairwoman Lina M. Khan said in a statement. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

Advocates for non-competes see them as an incentive for companies particularly those engaged in higher skilled work. They are one way for companies to protect high-level, confidential information from being brought to competitors.

But some studies have demonstrated that expanded use of non-competes may be harming workers’ wages by restricting their mobility and potentially limiting the competition that powers the economy.

“First, non-competes reduce pay for lower-wage workers,” a study from the Minneapolis Federal Reserve Bank noted. “Second, low-wage workers have less access to legal advice than other workers have, making it more difficult for them to enter a fair, well-informed negotiation with employers over their non-compete contracts.”

NBC News– January 5, 2023 By Eli M. Rosenberg

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