Non-compete agreements should be banned, President Biden says

Joe Biden mentioned hamburgers in his 2023 State of the Union address.

Specifically, the president wondered why ringing up your burger order might sign a non-compete agreement that prevents them from working at a burger restaurant nearby that pays better — the kind of deal that 30 million workers in the U.S. are also eyeing. Biden promised that these contracts would soon be banned.

That’s the current work of Federal Trade Commission Chair Lina Khan, who announced in January that the agency proposed a rule to ban the practice of forcing workers to sign non-compete clauses, which prohibit workers from working for a certain period of time for their employer’s competitors. After they quit their jobs.

“Freedom to change jobs is key to economic freedom and a competitive, prosperous economy,” Khan said in a statement. “Non-competition prevents workers from freely changing jobs, deprives them of higher wages and better working conditions, and deprives businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule will promote greater dynamism, innovation and healthy competition.”

If enacted, the proposed rule would give Americans more choice in where they work and, by extension, higher wages. They can more easily work for rival companies or start their own companies with less fear of being sued. Such mobility can make an already tight hiring economy even tighter, as workers have more options that they can take.

The notice of the proposed rulemaking came a day after the FTC sued three companies over their non-compete clauses, the first time the agency has done so. It also came after several other efforts the agency has taken to protect competition, including lawsuits to block or unwind mergers and efforts by the Commission and the Department of Commerce to modernize merger rules.

The final rule will be issued after the ongoing public comment period. Congress could review and disapprove the rule, which would overturn it, but that rarely happens and is especially unlikely with a Democratic-majority Senate. Once the rule is finalized, its validity will be tested in court.

The proposed rule followed calls from advocacy groups and the Biden administration to ban the non-compete practice, so it’s no surprise that Biden is now praising the FTC’s move. His 2021 pro-competition executive order asked the FTC to use its authority to ban non-competes, and consumer rights group Public Citizen made the same request in a letter to the FTC last December. Several consumer and labor groups also petitioned the FTC for such rules during the Trump administration. Non-compete clauses are already banned in several states, including California, where some – but not all – notoriously non-competition-heavy tech companies are based.

The FTC estimates that the proposed rule could raise wages by $300 billion a year and affect 30 million Americans. A 2014 survey by The Economist found that about 20 percent of workers have non-compete clauses in their contracts. That number is perhaps 50 percent for people in high-skilled and high-tech jobs, according to Matt Marks, a professor at Cornell University’s School of Economics and Management who has been studying noncompete agreements for 15 years.

“I signed my first non-compete in 1995 and didn’t understand what I was getting myself into — and that’s the case with many, if not most, workers,” he said.

Marks added that these contracts not only specify that you can’t share a particular company’s secrets, but are often interpreted more broadly so that a person can’t use their skills before working for that company — which he said could be something Weakens high-skilled workers and entrepreneurs.

One person interviewed by Marks, a woman with a PhD in speech recognition who has worked at Bell Labs for nearly two decades, said that after 18 months working at a startup she had to get a “random computer programming” job outside her field where she’d been a Signed a non-compete agreement.

“You’ve been working in this industry for 20 years? Oh, well, sorry, you can’t do it anymore because you’ve worked for us for two years,” Marx explained. “Tough luck, you’ll have to find something else.”

Opponents of non-compete clauses say the contracts prohibit workers from seeking employment with competitors or even within the same industry. By doing so, they limit job mobility and prevent workers from being able to push for higher wages, since workers who change jobs often receive higher wages. These trends can send them on long job searches or even “career trajectories.”

Pro-consumer and pro-labor groups applauded the FTC’s move, as well as the agency itself.

“The FTC’s move today to ban non-compete clauses will provide a big boost for small businesses and entrepreneurs,” Stacey Mitchell, co-director of the Institute for Local Self-Reliance, told Recode. He added that non-competes could make it harder for workers to leave employers to start their own businesses that could compete with them.

Sen. Elizabeth Warren (D-MA) praised the FTC’s move to protect “workers” from “harmful contracts.” he Tweeted“Noncompete clauses give companies unfair power over workers, enabling workers to cut wages and benefits without fear of seeking new jobs or starting their own businesses.”

Employer groups such as the US Chamber of Commerce have argued that non-compete clauses can actually be anticompetitive because they protect an “employer’s special investment in training and disclosure of sensitive business information to its employees.” In a statement released shortly after the FTC’s announcement, the agency called the rulemaking “blatantly illegal” because it said the FTC did not have the authority to promulgate the rule. “When used appropriately, non-compete agreements are an important tool to encourage innovation and preserve competition,” the chamber said in an emailed statement.

Update, February 7, 11:25 pm ET: This story, originally published Jan. 5, has been updated to include Biden’s State of the Union invocation banning the non-compete clause.