In a move that could raise wages and increase competition, the Federal Trade Commission on Thursday unveiled a rule that would block companies from limiting their employees' ability to work for a rival.
Provisions of labor contracts that prohibit workers from leaving for a competitor or starting a competing business for months or years after their employment would be banned under a proposed rule. The agreements have been applied to a wide range of workers.
Studies show that noncompetes affect roughly 20 percent to 45 percent of private-sector U.S. workers and that job switch is one of the more reliable ways of getting a raise. Many economists think they can explain why pay for middle-income workers has remained stagnant.
Competition within industries is reduced by the use of noncompetes. The arrangements may make it hard for companies to find good workers.
The F.T.C. proposal is the latest in a series of moves to rein in the power of large companies.
Ms. Khan said in a statement announcing the proposal that noncompetes deprive businesses of a talent pool that they need to build and expand. The F.T.C. proposes to end this practice in order to promote healthy competition.
The public will be able to comment on the proposal for 60 days, at which time the agency will make it final. According to an F.T.C document, the rule would take effect 180 days after the final version is published.
The rule could increase wages by $300 billion a year, according to the agency. According to Evan Starr, an economist at the University of Maryland, a wage increase was possible after noncompetes were eliminated.
Dr. Starr said noncompetes appeared to lower wages for workers directly covered by them and for other workers, partly by making the hiring process more expensive for employers, who must spend time figuring out whom they can hire and whom they can't.
Wages tend to be higher in states with restrictions on noncompetes. In Hawaii, wages for newly hired tech workers increased by 4% after the state banned noncompetes. The wages of hourly workers in Oregon rose by 2 to 3 percent when noncompetes were no longer valid for low- wage workers.
More highly paid and educated workers are more likely to be employed by companies that use noncompetes for low wage workers.
Half of the states restrict the use of noncompetes and a small number deem them largely unenforceable.
Many workers in states where noncompetes are included in employment contracts turn down job offers because of the provisions, suggesting that state regulations may have limited effects. Experts say that many workers in those states don't know that the provisions aren't valid.
According to Elizabeth Wilkins, the director of the F.T.C., the use of noncompetes to restrict workers' mobility significantly suppresses workers' wages.
Employers would be required to withdraw existing noncompetes and workers would be told that they no longer apply under the proposal from the commission. It would be against the law for an employer to enter into a noncompete with a worker or to try to do so, or to suggest that a worker is bound by a noncompete when he or she isn't.
Independent contractors, interns and other workers are covered by the proposal.
If employees are free to turn down a job if they want to join another company, or if they can bargain for higher pay in return for accepting the restriction, then they are free to do so. Proponents argue that noncompetes make employers more likely to invest in training and to share sensitive information with workers, which they might not have done otherwise.
Some of the conclusions of the study are not in line with other research.
Dr. Starr said that there was no evidence that most employees were able to bargain over non-competes, but that it appeared that businesses were encouraged to invest more in training. Only 10 percent of workers wanted to bargain for concessions in order to sign a noncompete. After accepting a job offer, about one third became aware of the noncompete.
The F.T.C. has the authority to prohibit unfair methods of competition according to Ms. Khan.
A senior official in the antitrust division of the Justice Department believes that the rule could be challenged in court. She said that opponents would argue that the relevant federal statute is too vague to guide the agency in putting forth a rule banning noncompetes, and that the evidence the agency has on their effects is too limited to support a rule.
The F.T.C. has been led by Ms. Khan since last year. She and her allies hope to reverse a turn in recent decades towards more conservative antitrust law, which they say enabled runaway concentration, limited options for consumers and squeezed small businesses.
Ms. Khan has brought lawsuits to stop Microsoft from buying a video game publisher and from buying a virtual reality start-up. The cases are likely to face a lot of scrutiny from the courts. If the agency takes more risks, Ms. Khan is prepared to lose her cases.
They want to increase the focus of the antitrust agencies on empowering workers. The Justice Department was able to block the purchase of Simon & Schuster by Penguin Random House because they argued that the deal would lower compensation for authors.
One question looming over the discussion of noncompetes is what effect banning them may have on prices during a period of high inflation, which tends to raise wages.
The experience of the past two years, when rates of quitting and job hopping have been high, suggests that noncompetes may not be as big of an obstacle to worker mobility as they have historically been. It's possible that banning them won't have much of a long-term effect on wages.
The more pronounced effect of a ban may come in the intermediate and long term, once the job market improves, according to some economists. At that point, noncompetes could decide to switch jobs and take a pay cut.
A way to help sustain the increase in worker power over the last couple of years is by doing something like this.
David was a contributor.
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