The Biden administration is getting extremely close to passing a rule that would ban the use of non-compete agreements — a restrictive contract that prevents employees from finding work with competing companies.
This ruling builds on a statement released by the Federal Trade Commission (FTC) In January which details the harmful implications these contracts have on competition in labor, products, and service markets.
By making it easier to search for more lucrative opportunities, the FTC estimates that banning noncompetes could increase workers' earnings by almost $300 billion a year, which would be a massive win for the one in five US workers that are currently subject to these agreements.
The FTC is Proposing to Ban Non-Compete Agreements
Last week, President Biden announced that his administration is in the final stages of issuing a rule that would prohibit businesses from issuing non-compete agreements, and similar contracts, to their workers. This builds on the FTC's proposed ban which was issued on the 5th of January, that deemed the contacts to be an exploitative practice.
If successful, the government's ruling would affect employers from across industries and would have an acute impact on the biotech, pharmaceutical, and healthcare sectors, where agreements of these kinds have become commonplace.
Non-compete agreements are already severely limited in California, North Dakota, Oklahoma, and the District of Columba, and their use against low-wage workers are banned outright in a number of states including Maine, Maryland, and Washington.
However, if the Biden administration decides to implement this ban, employers across all US states would be prevented from issuing these agreements, making non-compete contracts in their current form completely obsolete.
What's more, in addition to this veto, this regulation would also outlaw adjacent employment clauses that have similar effects as non-competes, force employers to notify workers that their agreements are no longer valid, and ban them from threatening staffers with non-competes that aren't legal or enforceable.
But as the FTC and the Biden administration rally together to take down non-competes, what's the problem with the clause anyway?
The Issue with Non-Compete Agreements
While non-competes supposedly date back to the reconstruction era, they were initially used in the corporate world to protect trade secrets and other confidential information from competing businesses. However, in recent years, the employment contract has increasingly been leveraged by employers to exert an unnecessary amount of control over their workers.
According to the FTC themselves, non-competes are responsible for suppressing wages and career progression, by making it harder, and in some cases impossible, for employees to find new opportunities in the same industry.
“Noncompetes are basically locking up workers, which means they are not able to match with the best jobs. This is bad for competition. It is bad for business dynamism. It is bad for innovation.” Chair Lina Khan, Chairperson of the Federal Trade Commission (FTC)
Chair Lina Khan, the Chairperson of the FTC believes the clause can have a negative impact on the economy too, due to the lack of job mobility that is caused by blocking workers from switching freely between jobs.
In many cases, non-compete agreements can also backfire for employers. This is because by forcing their workers to sign the contract — especially in states that regulate their use — they risk facing litigation from employees. The issues non-compete contracts seek to address are also often covered by confidentiality clauses too, making their use redundant in most corporate settings.
Why the FTC's Proposed Bans Could Benefit Workers
But what does Biden's proposed ban on non-compete mean for the average Joe? Well, in simple terms, getting rid of the restrictive clause could prove to be very lucrative for the 18% of US workers that are currently subject to the agreement.
In fact, according to the FCT, ditching the outdated contract could increase workers' yearly earnings by up to $300 billion. This wouldn't just affect white-collar workers either. Since companies that use non-competes belong to a wide range of industries, from production and hospitality to healthcare, this ban has the potential to improve wages across every facet of the US's labor market.
In a climate where an alarming proportion of workers deal with salary stagnation, for a large portion of the US workforce, Biden's pending ban couldn't come soon enough.