Dive Brief:
- The Federal Trade Commission today released a proposed rule to make it illegal for companies to require new-hires to sign non-compete agreements and would require companies to rescind existing non-competes. It would also make it illegal for companies in states, like California, in which non-competes are illegal to represent to people that they’re subject to non-competes. Non-disclosure agreements could be affected too if they’re written so broadly as to amount to a non-compete.
- The move is part of the Biden administration’s aggressive use of the federal government’s antitrust and unfair practices laws to boost competition. The FTC said it’s basing its authority for the rule on Section 5 of the Federal Trade Commission Act, which authorizes the agency to go after unfair methods of competition.
- “Non-competes 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,” FTC Chair Lina Khan said in a statement. “By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
Dive Insight:
The FTC says non-competes cost workers almost $300 billion a year in lost income by preventing people from taking their skills to another employer for more money or better conditions. Even workers not subject to non-competes are impacted because of the way the agreements keep wages down.
“The proposed rule would ensure that employers can’t exploit their outsized bargaining power to limit workers’ opportunities and stifle competition,” said Elizabeth Wilkins, director of FTC policy planning.
About a quarter of workers are subject to the agreements, the agency says. For the last decade or so, employers have been increasing their use of the agreements, including for lower-paid workers who in the past were not typically subject to them because they don’t necessarily have access to sensitive information or have a client base that could go with them to another employer.
Some McDonald’s franchises are among the high-profile employers whose use of the agreements for low-wage workers has attracted attention.
Extending the use of the agreements to fast-food and other lower-wage workers has triggered a number of state laws in recent years, and at the federal level a more aggressive enforcement posture by the FTC and the Department of Justice.
This stepped-up enforcement effort is “definitely a big reaction to low-wage employee non-competes,” Margaret Scheele, an attorney with on-demand legal services firm Outside GC, told Legal Dive last year. “For years employers have been putting policies in place where they would have employees sign these agreements without really trying to make a distinction between who really needs and doesn’t need to have a non-compete.”
Should it move forward with finalizing the rule, the FTC can expect to be challenged in court, legal specialists say, because it’s not clear Section 5 of the FTC Act gives it the authority to promulgate such a narrowly targeted rule.
The agency was already expecting to face legal pushback from its growing reliance on Section 5 for its individual enforcement actions against companies.
“The fact that a federal agency is coming in and using Sec. 5 of the FTC Act, saying these things could be illegal, means … cases will be litigated … to see if the FTC indeed has the authority,” Dennis Cuneo of Fisher Phillips told Legal Dive last year.
Christine Wilson, the lone FTC commissioner of four to vote against issuing the proposed rule, said it breaks with precedent, doesn’t have sufficient data to support the view that the agreements are bad for competition, and is vulnerable to the Section 5 legal challenge.
“I am dubious that three unelected technocrats have somehow hit upon the right way to think about non-competes, and that all the preceding legal minds to examine this issue have gotten it wrong,” she said.
The agency is seeking public comment for 60 days, after which it will consider the input in any final rule it releases.
FTC Chair Khan said she hopes to get input on whether a distinction needs to be made between higher-income employees for whom non-competes have traditionally been aimed and lower-income wage workers.
“Senior executives or other highly paid workers … may be less vulnerable to coercion, but restraining them through non-competes may still harm competition,” Khan said in a statement she issued along with the two other commissioners who voted for the rule, Rebecca Kelly Slaughter and Alvaro Bedoya.
