The Federal Trade Commission, which enforces antitrust law in the United States, proposed a rule on Thursday that would prohibit companies from requiring workers to sign noncompete provisions as well as some training repayment agreements, which companies use to keep workers from leaving for better jobs.
Noncompete agreements “restrict workers’ ability to freely switch jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand,” according to FTC Chair Lina Khan in a statement.
The proposed rule is the latest indication of the Biden administration’s support for labor, which also includes backing legislation to make it more difficult for an employer to classify a worker as a “independent contractor,” which generally means fewer benefits and legal protections.
President Joe Biden and Senate Majority Leader Chuck Schumer both praised the FTC’s move to prohibit noncompete provisions, with Biden claiming that they “are simply designed to lower people’s wages.”
According to Schumer, the provisions have “held American workers hostage for decades.”
According to the agency, if the rule is implemented, wages for US workers will rise by $300 billion per year, and an estimated 30 million Americans will have better career opportunities.
The rule, which could take months to implement, would require companies with existing noncompete agreements to cancel them and notify current and former employees.
It would also prohibit employers from requiring employees to reimburse them for certain types of training if they leave before a certain period of time, a strategy that some employers began employing after noncompete provisions came under increased scrutiny. Training reimbursement would be prohibited if it “is not reasonably related to the costs incurred by the employer for training the worker,” according to the proposed rule.
The American Economic Liberties Project’s executive director, Sarah Miller, welcomed the rule, saying that “coercive noncompete agreements have unfairly denied millions of working people the freedom to change jobs, negotiate for better pay, and start new businesses.”
According to Sean Heather, the US Chamber of Commerce’s antitrust expert, the chamber is considering suing to stop the rule, but not right away.
“We are considering legal action,” Heather said, adding that the Chamber did not believe the FTC had the statutory authority to issue competition rules.
According to Kristen Limarzi, a partner at Gibson Dunn & Crutcher LLP and a veteran of the U.S. Department of Justice’s Antitrust Division, challenges to the rule are likely and will focus on whether Congress clearly authorized the FTC to adopt nationwide bans on what the agency deems anticompetitive practices.
“Non-compete clauses are widely used in some parts of the country, and large employers and interest groups like the Chamber will be highly motivated to challenge the rule,” she explained.
Former acting head of the Justice Department’s Antitrust Division Richard Powers said it’s difficult to predict whether the FTC rule would withstand a legal challenge. “I think it’s probably one of the top questions,” Powers, who now works at Fried Frank, said.
The new rule was announced just one day after the agency announced that two major glass container manufacturers and a security firm had agreed to drop noncompete clauses.
Ardagh Glass S.A. and O-I Glass Inc, the two largest glass container manufacturers in the United States, both had noncompete clauses that affected over 1,700 employees.
According to the FTC, Ardagh typically prohibited former employees from working for another similar company for two years, whereas O-I Glass required written consent for former employees to take new jobs in the industry.
According to FTC Commissioner Rebecca Slaughter, surveys in 2020 estimate that 16% to 18% of all U.S. workers are subject to noncompete provisions. Meanwhile, according to the Cornell Survey Research Institute, nearly 10% of American workers surveyed in 2020 were covered by a training repayment agreement.