FTC chair: Non-compete clauses 'inflict major harm across the economy' and 'drive down wages'

09 January 2023

Last Thursday, the Federal Trade Commission announced that it is exploring a proposal to ban non-compete clauses in future employment contracts and nullify stipulations already in effect for around one-fifth of the American workforce.

These restrictive covenants, the FTC stated in its January 5th, 2023 press release, "blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends. Because non-compete clauses prevent workers from leaving jobs and decrease competition for workers, they lower wages for both workers who are subject to them as well as workers who are not. Non-compete clauses also prevent new businesses from forming, stifling entrepreneurship, and prevent novel innovation which would otherwise occur when workers are able to broadly share their ideas." The FTC calculated that eliminating non-compete clauses "would increase American workers’ earnings between $250 billion and $296 billion per year."

Pro-labor lawmakers and advocacy organizations quickly lauded the FTC's idea.

United States Senator Elizabeth Warren (D-Massachusetts) – a long-time champion of economic rights who dreamt up and established the Consumer Financial Protection Bureau – noted in a tweet that "non-compete clauses give companies unfair power over workers." Similarly, the American Economic Liberties Project called it "a victory for American workers and fair, competitive markets." AELP Executive Director Sarah Miller went on to add that the "use of non-competes to undermine fair competition for workers and prevent new businesses from entering the market is also an illegal practice under the antitrust laws."

The FTC's move comes amid historically high corporate profits, which coupled with lingering supply chain disruptions from the COVID-19 pandemic have led to rising prices for goods and services. Individuals atop the corporate hierarchy have enjoyed spectacular increases in compensation while wages for workers have seen only modest gains if any at all. Companies are also shedding significant chunks of their respective staff. Amazon, for example, is laying off at least eighteen thousand employees.

Amazon is one of the countless entities across a broad swath of industries that require prospective hires to comply with non-compete clauses in their contracts – meaning that their furloughed workers may find themselves unable to apply for or accept new jobs due to the risk of being sued.

On Monday, FTC Chairwoman Lina Khan published an editorial in The New York Times outlining why the agency is taking action against non-compete clauses – and the rationale extends far beyond their impacts on workers.

"A body of empirical research shows that they also inflict major harm across the economy. In fact, even if you aren’t personally bound by one, non-competes may be costing you money," wrote Khan. "Non-competes were long assumed to apply mainly to high-level executives with access to sensitive corporate information. But their use has exploded in the past few decades, extending far beyond the boardroom. Today, experts estimate that one out of every five American workers, or about 30 million people, are bound by a non-compete. Studies and media reports have found non-competes routinely invoked against fast-food workers, arborists and manual laborers, to name a few examples. Just this week, the Federal Trade Commission, where I am chair, settled allegations against a company in Michigan that prohibited its workers — security guards earning at or near the minimum wage — from going to work for a competitor within a 100-mile radius of their job location for two years. Each worker who violated the non-compete would have been liable for $100,000."

The consequences, Khan continued, are profound:

In theory, non-compete clauses promote investment and innovation by assuring companies that their employees can’t run off with valuable secrets. And, again in theory, workers should be paid more in exchange for agreeing to sign a contract that restricts their autonomy. But the reality looks very different. We know this because over the past few decades, several states restricted the enforceability of non-compete clauses to various degrees, usually because of court decisions. This created natural experiments, allowing researchers to draw causal inferences about their impact.

Their most staggering finding: Non-compete clauses systemically drive down wages, even for workers who aren’t bound by one. Every worker stuck in a job represents a position that isn’t opening up for someone else. And if employers know their workers can’t leave, they have less incentive to offer competitive pay and benefits, which puts downward pressure on wages for everyone.

Khan further pointed out that non-compete clauses are rarely challenged or negotiated by employees. This, at least partially, could be because of the competitiveness of the job market, concerns over excessive turnover, or a naïvité about one's rights. Beyond that, though, Khan stressed that "non-compete clauses tend to make markets less competitive. Rather than encouraging dynamism and new ideas, they can enable stale incumbents to lock out new rivals."

This has not only proven disadvantageous to start-ups, Khan added, but "the evidence to date suggests that non-competes suppress wages, reduce competition and keep innovative ideas from breaking into the market. One study even found that non-competes lead to higher prices for consumers by reducing competition in the heavily concentrated healthcare sector."

The FTC is "supposed to prevent" non-competes, Khan said, which is why "the rule would apply to professions across the board — janitors, nurses, engineers, journalists. Because employers often try to use non-competes even when they’re unenforceable, the rule would require companies to proactively notify employees currently subject to non-competes that those restrictions are now void."

Overall, Khan asserted that non-competes are a "burden on the economy" and that "tying down workers through non-competes risks blocking" the free flow of innovative ideas from "a tremendous pool of talent."

Khan concluded that "a thriving, dynamic economy depends on fair competition — not just for consumers, but also for workers. We should be skeptical of any methods designed to prevent it."

Click here to view Khan's full article (subscription required).

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