The Federal Trade Commission wants to give Americans the freedom to job-hop without pesky noncompete contracts getting in the way.
Employers often require staff to sign noncompetes, which prohibit them from working at competing companies even after they leave their jobs.
The FTC says these “exploitative” practices affect about 30 million workers, often forcing them to stay in jobs they hate, relocate when they don’t want to, move to a lower-paying field, leave the workforce altogether, or face expensive litigation.
“This would be an immediate shock that would allow millions of workers to be free to take a better job in their industry,” Evan Starr, an economics professor at the University of Maryland, told The New York Times. “I would expect the labor market to increase almost overnight.”
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Under the new rule, which goes into effect in about 120 days, nearly all those existing noncompetes become void. Companies can keep existing contracts for some senior executives, but that will only affect about 0.75% of workers, the FTC says. And employers are set to be barred from requiring any new noncompetes, even for senior executives.
“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,” Lina M. Khan, the FTC chair, said in the agency’s press release.
“The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market,” Khan added.
But ensuring this new rule actually goes into effect is another issue.
The US Chamber of Commerce, which lobbies on behalf of businesses, clapped back against the new rule in a press release on Tuesday, announcing that it intended to sue the FTC over what it called an “unlawful” and “blatant power grab” amounting to government “overreach.”
“This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy,” the Chamber of Commerce’s president and CEO, Suzanne P. Clark, said in a statement.
The FTC believes the new rule will help workers and the economy, estimating that it will lead to a 2.7% increase in new businesses every year, increase the average worker’s wages by $524 a year, and help lower the cost of healthcare by up to $194 billion over the next decade.
Some states, including California, Massachusetts, and Illinois, have already banned noncompetes at the state level. A top lawyer for the National Labor Relations Board has said that not only do noncompete clauses infringe on workers’ rights, but they are also usually illegal.