UPDATE 4/23/2023: The Federal Trade Commission voted Tuesday to sweep non-compete clauses into the dustbin of history, enacting a rule that invalidates almost all such existing clauses in employment contracts and bans them in all new contracts.The FTC voted 3-2 to issue this rule; Democratic appointees Alvaro Bedoya, Chair Lina M. Khan, Rebecca Kelly Slaughter voted yes, while Republican appointees Andrew N. Ferguson and Melissa Holyoak voted no. It came more than 15 months after the commission voted to hold that non-competes represented an unfair form of trade that the FTC has authority to ban. It then began a rule-making process that culminated in today’s final vote.“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” Khan said in a statement. The final rule’s language, as explained in a commission report (PDF), includes some changes from the initial proposal. Most significantly, it does not strike down existing non-compete clauses with senior executives, meaning corporate officers who have “policy-making authority” and made more than $151,164. (The FTC picked that number because it’s “the 85th percentile of earnings of full-time salaried workers nationally.”)The rule, unlike the earlier proposal, also doesn’t require employers to edit existing contracts to strip out non-compete clauses and instead lets them give notice to their workers that those parts are null and void. And it does not ban noncompete clauses agreed upon by people selling their own businesses. This rule does not affect employers requiring employees to sign non-disclosure agreements or seeking to enforce trade-secret laws on former employees who take their talents elsewhere. As it notes, businesses in California, where courts have long held non-competes unenforceable, often use those laws. The rule goes into effect 120 days after publication in the Federal Register, which has not yet happened. But it may have a date in court first: The US Chamber of Commerce announced Tuesday that it would challenge the rule in court. In a statement, President and CEO Suzanne P. Clark called it “not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive.” Original Story 1/6/2023: The Federal Trade Commission moved Thursday to make it easier for American employees to change jobs by banning “non-compete” clauses. The 3-1 vote by the FTC’s four commissioners found that these common provisions in employment contracts represent an unfair form of competition—as in, the kind of problem the FTC was created in 1914 to address. It will now hold a public-comment process on its proposed rule banning them.Non-competes give a job a contractual afterlife, requiring that the employee agree not to work for a competitor or start a competing business for a defined period of time—often a year—and sometimes in a defined location. Breaking one can leave an employee on the receiving end of a lawsuit; fear of possible legal bills alone is enough to keep many workers in line. “By design, noncompetes often close off a worker’s most natural alternative employment options: jobs in the same geographic area and professional field,” FTC Chair Lina Khan wrote in a statement joined by Commissioners Alvaro Bedoya and Rebecca Slaughter. “These restrictions can undermine core economic liberties, burdening Americans’ ability to freely switch jobs.”
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The proposed rule estimates that non-competes today hinder about 30 million American workers, or one in five overall, and that banning them “would increase American workers’ earnings between $250 billion and $296 billion per year.” It would therefore ban employers from asking employees to accept non-compete clauses and require them to rescind existing non-competes by 180 days after publication of the finished rule.Khan’s statement outlines three possible tweaks to the rule: whether it should cover senior executives, how it might apply to franchisors and franchisees, and how the FTC might affirm that employers can still use such alternative measures as confidentiality clauses or trade-secrets laws to protect their own investments. President Biden’s July 9, 2021 executive order on competition policy—which has already pushed regulatory agencies to consider right-to-repair policies and led the FTC to request public input on its approaches to digital mergers—tasked the FTC to address non-competes. But Khan’s order notes that the commission had started taking a closer look at these provisions four years ago. Advocates of outlawing non-competes don’t have to point to other countries to cite potential benefits: California law bans them outright as a restraint of trade, and the state’s courts consistently refuse to enforce them. Multiple economic studies (for instance, a 2005 paper for the National Bureau of Economic Research) have found that the resulting freedom to change jobs and launch startups helped make Silicon Valley more innovative and competitive. Other states have yet to take the hint and abolish non-competes, even as they’ve tried to position themselves as a Silicon [fill in the blank]; the FTC’s action may now do them all a favor.
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