Federal Trade Commission proposes ban on noncompete clauses

Amna Nawaz:

The Federal Trade Commission today issued a proposal banning noncompete clauses that prevent workers from switching employers or starting a new business.

About one in five Americans, approximately 30 million people, are affected by these policies. The FTC will accept public comments for 60 days before it can finalize the rule.

Elizabeth Wilkins, director of the Office of Policy Planning for the FTC, has worked on this proposal, and joins me now.

Welcome.

Elizabeth Wilkins, Office of Policy Planning Director, Federal Trade Commission: Thank you.

Amna Nawaz:

Thanks for being here.

So, most people think of noncompetes and associate them with high-paying jobs, tech workers and so on. But what are some of the industries and the jobs that we don't typically associate with noncompetes that are impacted by this?

Elizabeth Wilkins:

Absolutely.

You're totally right. People sort of think of folks in the boardroom who might be impacted by these, but 30 million Americans we think are covered by noncompetes. So that's everybody from minimum wage workers, security guards, folks who are flipping burgers, to middle-wage workers, journalists, nurses. All kinds of folks are impacted by this.

Amna Nawaz:

And about half of all states already have some kind of rules on the books either limiting their use or outright banning them.

So, I guess the question is, why is a federal rule necessary right now?

Elizabeth Wilkins:

One part is that you just said, there are a couple states that fully ban noncompetes already, but not all of them do.

And one of the really interesting and, frankly, sort of disturbing pieces of evidence that we have is that, in states that ban noncompetes, you actually see them in just as many contracts as states that don't. That means workers don't know what their rights are. And workers may be chilled from trying to find another job, getting a better-paying job, even when those clauses are unenforceable.

So, a clear federal rule would go a long way to making sure that people can actually switch jobs, find better pay and better working conditions.

Amna Nawaz:

So, if this proposal moves forward, what do you estimate could be the potential impact on worker wages?

Elizabeth Wilkins:

Pretty big.

Right now, this is a proposal, but we preliminarily find that there could be an increase in wages of $250 billion to $300 billion for workers who, again, can find better wages and working conditions and where employers would have to really compete for those workers, instead of preventing them from moving.

Amna Nawaz:

But you look at workers are now, especially over the last two years, moving through the pandemic, right, we have seen unusually high rates of quitting and also job-switching.

Numbers from November of 2021 suggest some 4.5 million workers have voluntarily left their jobs. Those numbers seem to suggest that noncompetes aren't really an issue. They're not an impediment to worker mobility, right? So what kind of immediate impact might this have?

Elizabeth Wilkins:

We have seen sort of an unprecedented switching in the wake of the pandemic. This is one big shock to the labor — to the labor market.

But we're talking about a long-term effect, if we can remove noncompetes from these clauses. We are hoping that this is good long term for the productivity of the economy, when workers can match with the jobs that they're best suited to. That's good for employers also.

And, again, this means that, as we have seen in this moment, employers will have to compete, based on wages and benefits for their workers.

Amna Nawaz:

In this market right now, it's a top — tight job market, right? Workers have a lot of leverage. If you don't want to take a job where there is a noncompete, can't you just not take that job, go find another one?

Elizabeth Wilkins:

That's the ideal.

Some of the research suggests that workers don't even know that they're signing a contract with a noncompete clause. When you start a job, your first day, you get a stack of H.R. paperwork. You may or may not know what's in it. Some workers are asked to sign a noncompete after they start.

So this is a problem even for well-educated employees. They don't know what they're signing, and they don't know what they're signing up for, until they try and get another job, and they find out that they can't.

Amna Nawaz:

There are studies that show states that restrict noncompetes do see higher wages. There's some competing research too, though.

Some suggest that noncompetes actually spur job creation in some start-ups, that they leave firms to want to invest in the people that they hire, so that they don't go somewhere else. What do you say to that?

Elizabeth Wilkins:

That's totally right.

We sort of acknowledge in our proposal that there are some good reasons that employers might want to use noncompetes. A couple of things. First of all, employers have alternatives. There is nondisclosure agreements if they're worried about sort of information or trade secrets. There's also trade secret law. There are thousands of lawsuits under trade secret law that are brought every year.

And then the other is, obviously, if workers aren't restricted, employers can say, you know what? I will offer you more, I will offer you better for you to stay because this investment is worth it.

Amna Nawaz:

It is a proposal. There are some suggesting it's very vague and that it could face legal challenges. Do you anticipate that?

Elizabeth Wilkins:

We think we have really clear authority here to promulgate this kind of a rule.

Congress gave us authority, and I think actually we feel fairly obligated to make sure that, if we have this authority to prevent unfair methods of competition like this in a place that's appropriate, like when there's economy-wide harm, that we should use it.

Amna Nawaz:

Elizabeth Wilkins, director of the Office of Policy Planning from the FTC, thank you for joining us.

Elizabeth Wilkins:

Thanks so much.