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The FTC is considering prohibiting noncompete agreements. What does this mean for employees and businesses?

If the Federal Trade Commission is successful in prohibiting noncompete clauses, workers will be able to change jobs more freely than they can now. Opponents, however, warn that freedom will not be free.

Noncompete agreements, which the FTC claims are signed as a condition of employment by one-fifth of all Americans, prohibit employees from working for a competing employer or starting a competing business, typically within a certain geographic area and time period after a worker’s employment ends. According to the FTC, these agreements suppress wages and stifle innovation and entrepreneurship.

The FTC estimates that its proposal to ban “noncompetes” could increase wages by nearly $300 billion per year and expand career opportunities for approximately 30 million Americans, but opponents are sceptical. They argue that most noncompetes are no longer enforced, and that if they are, it is primarily with highly paid employees who have access to confidential information or client lists, rather than the average worker.

A ban “could really put a leash on the ease of sharing information from a corporate standpoint,” according to Maurice Cayer, distinguished lecturer and coordinator of the M.S. in Human Resources at the University of New Haven. “What that would do is prevent employees from having the information they need to be more innovative.”

Who has nondisclosure agreements?

Noncompetes are most likely to be found in high-skill, high-paying jobs, such as those in technology, pharmaceuticals, or manufacturing, where breakthrough developments are critical. They’re also common in companies that fear client poaching, such as financial firms that rely heavily on sales. According to a Minneapolis Federal Reserve report from last year, nearly one-third of workers in some of those industries have noncompetes.

According to the Minneapolis Federal Reserve, more than one in ten low- and moderate-income workers have a noncompete agreement.

Why does the FTC want to outlaw noncompete agreements?

They “”Because they prevent workers from leaving jobs and reduce competition for workers, they lower wages for both workers subject to them and workers who are not,” the FTC stated. They also prevent people from sharing ideas and starting new businesses, which hinders innovation, according to the report.

Even if noncompete agreements are rarely enforced, “the mere threat of enforcement can limit their (workers’) negotiating power and career opportunities,” according to the Minneapolis Fed.

Worse, if you are unfortunate enough to be sued, your life can be turned upside down.

“Until it happens to you, people don’t realise how disruptive signing non-compete agreements can be to your life,” said Joby George, director of product management at cloud computing company Veeva. “I joined my previous company right out of college and signed the paperwork without thinking I had a choice. When I accepted a new job fourteen years later, our entire lives were in disarray. When I resigned, I was escorted out the door and served legal papers in front of my wife and children at my home. After nearly a year of legal proceedings, the case was dismissed, with the conclusion that I had done nothing wrong.”

What are some of the reasons for lifting the ban?

According to Peter Glennon, New York business and employment litigation attorney and founder of Glennon Law Firm, workers may receive less skill training and career development because companies will not want to spend the money and time if employees leave.

Because you don’t want that information to walk out the door with the employee, there may be less open sharing of financials, marketing plans, and business forecasting in the company. Yes, confidentiality agreements would still be permitted, but the employee has access to the information and could use it to benefit a competitor without disclosing the information or otherwise violating the confidentiality agreement.”

Instead of benefiting low-wage and low-skilled workers, this could harm them.

“Companies may hire only experienced workers who developed on their own instead of hiring junior people and developing them, as minimum wage increases appear to have accelerated the use of computers and apps, and now even robots at fast food restaurants, and offshore outsourcing,” Glennon said.

“Another disadvantage is that the pool of trained, qualified employees may become smaller. “Perhaps this will encourage more foreign outsourcing,” he added.

Is it possible that the ban will become law?

“Zero percent chance,” Cayer said, noting that a diluted variation that narrowly limits the effective time of a noncompete could pass.

The FTC is seeking public comment for the next 60 days, and Cayer anticipates that all industries will have something to say to the FTC. If the FTC approves the rule, it will take effect 180 days after the final version is published.

However, politics and litigation could stymie the process. The US Chamber of Commerce has already called the FTC’s plan “unlawful” and stated that it will be challenged.

“Since the agency’s creation over 100 years ago, Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule. “The Chamber is confident that this illegal action will be overturned,” it said in a statement.

“There are separation of powers issues regarding rule-making versus legislating, the FTC as an executive agency versus Congress,” Glennon stated. Rule approvals present administrative challenges. Furthermore, the right to contract raises constitutional concerns. All of those issues will almost certainly be litigated.”

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