Jan 6, 2023 - Economy & Business

White House's latest pro-labor policy is banning noncompetes

Illustration of the White House with columns shaped like hands in fists

Illustration: Annelise Capossela/Axios

One of the broadest and most pro-worker initiatives to come out of the Biden administration dropped from a somewhat surprising place Thursday: The Federal Trade Commission proposed a broad ban on noncompete agreements, which companies use to prevent workers from taking jobs with competitors.

Why it matters: It's a big swing for the administration and the FTC, which has taken a more aggressive stand on anti-competitive practices under Biden-appointee Lina Khan. Some experts say the rule might get knocked down in court.

  • If enacted, the ban could radically shift the balance of power between employers and workers across just about every industry and pay level — from fast-food jockeys to doctors to CEOs.
  • Even the most senior executives would not be able to contract around the rule, an FTC official tells Axios.

How it works: Though lawyers say noncompete agreements are hard to enforce in court, these situations rarely escalate to litigation — instead, the noncompetes have a chilling effect.

  • Both prospective employers and the workers themselves can be scared off just by the existence of a noncompete. That leaves many workers stuck, potentially unable to obtain a new job for more money, use an offer to negotiate for a raise, or simply advance in their careers.
  • Even low-wage workers get caught in these contracts: 12% of workers who earn $20 per hour or less reported having a noncompete agreement in their current or most recent job, according to research from the Federal Reserve Bank of Minneapolis. It's 18% among those who earn more.

Between the lines: Restricting noncompetes appears to raise worker pay, according to research from a couple of states that have moved to do so.

  • Proponents say it's also good for business. They point to California, which prohibits these agreements. Silicon Valley has thrived in part because companies can poach talent, and engineers can job-hop and start their own businesses.

The other side: Employers argue they need noncompetes to protect trade secrets.

  • But for entry-level or low-wage workers — like sandwich makers or camp counselors — it's harder to understand what kind of proprietary information they might have.

Case study: When journalist Stephanie Russell-Kraft took her first journalism job in 2013 at the age of 25, she had to sign a noncompete and was told it wasn't a big deal, she recalled to Axios. It only applied to freelancing, she believed.

  • But when she took a new job at another publication — a step up from a trade magazine to a national outlet — her previous employer flagged the agreement to her new company. Days later she was fired from her new job.
  • It took years for her to find full-time work  she got by freelancing and relying on her partner's income. "It completely reshaped my career," she says. (Ultimately, the New York State attorney general settled a case with her employer, who agreed to stop using noncompetes.)

What they're saying: "These agreements block millions of retail workers, construction workers, and other working folks from taking a better job, getting better pay and benefits, in the same field," said President Biden in a Cabinet meeting Thursday. He called the rule a win for workers.

  • Progressive and pro-labor groups lauded the action: "This will fundamentally change the basic balance of power between employees and employers," said Sarah Miller, founder of the American Economic Liberties Project, a nonprofit dedicated to battling corporate concentration.
  • The Chamber of Commerce, however, called the move blatantly unlawful.

What's next: The FTC is asking for comments on the proposal, and observers expect a court fight at some point.

  • "It's unclear if the FTC has the authority to do this," said Ben Rossen, who was a senior attorney at the agency before leaving in 2021.
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