The FTC in January proposed a rule to prohibit companies from including noncompete clauses in employment agreements.
According to FTC, noncompete contracts, which usually prevent employees from seeking employment with a competitor for a certain period after they leave a company, impact roughly one in five American workers. Noncompete clauses have a negative impact on both workers and companies, the agency argued.
“Noncompetes are basically locking up workers, which means they are not able to match with the best jobs,” said FTC Chair Lina Khan. “This is bad for competition. It is bad for business dynamism. It is bad for innovation.”
If FTC’s proposed rule is adopted, companies will not be allowed to impose noncompete contracts on new employees or maintain existing contracts. In addition, the rule stipulates that companies with active noncompete clauses must inform workers that the contracts are void.
FTC estimated that banning noncompete clauses would boost annual employee earnings by up to $296 billion. According to the agency, part of the increase represents an income transfer from firms to workers and consumers to workers, which would occur if firms were compelled to raise prices in response to wage increases aimed at retaining workers, The Advisory Board reports.
A ban on noncompete clauses would have a significant impact in the healthcare industry, with research suggesting that at least 40% of physicians are employed under restrictive covenants that often prohibit them from working for competitors within a 30-mile radius for a period of one to two years. Read more.
