Banning Noncompetes: A Groundbreaking Step for Worker Power, and What Must Come Next
January 11, 2023
By Trisha Maharaj
On January 5, the Federal Trade Commission (FTC) issued a proposed rule that would regulate, and effectively ban, noncompete clauses in employment contracts. The rule would cover nearly 30 million workers, including independent contractors and apprentices, who are often excluded from labor protections. This move, widely celebrated by workers’ rights groups, reflects a newly invigorated FTC that is actively implementing the Treasury Department’s recommendations to build worker power and curb corporate concentration, using regulations that cut across various aspects of the labor market.
Noncompete agreements distort the balance of power between workers and employers and stifle innovation. Banning them rebalances that power, strengthening workers’ bargaining power; creating better, more equitable working conditions; and curbing corporate concentration. And it’s a big step to build on: The Biden administration must continue the momentum through a whole-of-government approach to increasing worker power.
Noncompetes distort the balance of power between workers and employers.
Noncompete agreements, which prevent workers from leaving their jobs to go work for a competitor until after a specified amount of time, affect up to 45 percent of US workers in the private sector, restricting their ability to seek better job opportunities. As authors Suresh Naidu and Aaron Sojourner explained in a 2020 Roosevelt report, these agreements contribute to monopsony—where employers exert disproportionate labor market power over workers—by limiting workers’ bargaining power and job mobility. When employers hold such outsized power over workers, it allows them to pay lower wages, provide few benefits, and maintain poor working conditions. Banning noncompete agreements, which will allow workers to more easily quit jobs for outside offers, will force companies to compete for workers and foster a labor market in which workers have more power to negotiate good wages and working conditions.
Noncompetes are particularly punitive for marginalized workers: As Roosevelt’s Alí Bustamante and Anna Smith have explained, people of color and women—who already have the least bargaining power due to systemic discrimination—are disproportionately harmed by such agreements. Though low-wage workers often possess no trade secrets, a 2018 Roosevelt report explains that they are bound to noncompetes with startling frequency, which prevents them from searching for new jobs and diminishes their voice and power.
Noncompetes stifle innovation.
Noncompete agreements are also an issue of antitrust policy, argues Ketan Ahuja in a recent report. They stifle innovation by restricting the movement of workers and therefore the exchange of information between companies. It is the circulation of employees, know-how, and ideas that lead to innovation, Ahuja writes, and so in order to encourage innovation and competition, it is essential that workers be able to take their tacit knowledge to different firms. Banning noncompetes will therefore not only balance power between employers and workers but also address corporate concentration in the labor market.
Banning noncompetes is a groundbreaking step, but more needs to be done.
It is significant that the FTC’s proposed rule is designed so that it is applicable to almost all workers and work arrangements. As Kate Andrias and Brishen Rogers have noted, most labor law does not extend protections to all workers, often leaving out workers in whole sectors of the economy, like independent contractors and apprentices. They argue that ensuring all workers are covered by the law is important in its own right, but is also essential for larger, pro-worker labor law reforms. When considering how to extend protection from noncompetes, the proposed rule is also a tool that can be used widely by the federal government in different facets of the labor market to safeguard workers’ bargaining power. For example, Naidu and Sojourner recommend banning the use of noncompete agreements in federally funded workforce development and training programs, to ensure that government funding is used in ways that actively build worker power and voice.
Overall, the FTC’s proposal of regulations to ban noncompete agreements is a significant move for the Biden administration, one that could represent crucial progress toward the administration’s commitment to empowering workers. But as Roosevelt fellow Hiba Hafiz has argued, discrete regulation by individual agencies will not be enough to truly address the decline in worker power. Instead, the FTC’s proposed rule on noncompete agreements must be just one part of a whole-of-government effort on behalf of workers, including interagency coordination to collect and share indicators of workers’ bargaining power by focusing on workers’ exit options and job mobility. These indicators include labor market tightness, labor market concentration, minimum wage levels, costs associated with changing jobs, and any employment or antitrust law violations by employers that demonstrate monopsony.
To meaningfully build worker voice and curb corporate concentration, the Biden administration cannot stop here. It must call upon the full force of government to respond to the ongoing decline in worker power in the labor market. These efforts could include increasing the resources of labor agencies to better enforce worker protections and fight noncompliance, empowering the Consumer Financial Protection Bureau to fight deceptive and unfair contracting practices in employment contracts and the Department of Justice to monitor labor exemptions to antitrust laws and increase worker exit options, and designing social safety net programs to strengthen worker power. In crafting this whole-of-government approach, the far-reaching scope of the FTC’s proposed rule should be as a guidepost for ensuring equitable regulation so that all workers get a share of economic prosperity and no one is left behind.