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FTC proposes to ban non-compete clauses for workers

WASHINGTON — The Federal Trade Commission on Thursday released a plan to ban non-compete clauses, a proposal that would allow workers to take jobs at or start competing companies but the prospect of legal ones Resistance raised by companies who say the practice has a legitimate purpose.

The FTC said non-competition clauses are an exploitative practice that undermines a 109-year-old law prohibiting unfair practices in competition. Non-compete clauses, which typically prohibit employees from moving to a competitor for a period after they quit, affect nearly one in five American workers, according to the agency. The clauses, long associated with higher-paid managers, have also been imposed on lower-paid workers who do not have access to trade secrets, strategic plans and other reasons that could be used to hinder job changes. says the agency.

If the FTC eventually votes to accept the proposal, companies would have to lift the non-compete obligations imposed on workers and notify workers of the change. FTC officials say non-competition clauses depress wages, discourage the creation of new businesses and affect companies’ ability to hire the workers they need to grow.

“Non-competitors are basically locking up workers, which means they’re not able to compete with the best jobs,” Chairwoman Lina Khan said on a call with reporters on Wednesday. “It’s bad for the competition. This is bad for business dynamics. This is bad for innovation.”

The four-member commission voted 3-1 last month to publish the proposal, which is subject to 60 days of public comment before it can be adopted as a regulation. Republican Commissioner Christine Wilson voted against the plan, writing in a dissent that the FTC had collected scant evidence to support a total ban on non-compete clauses.

The proposal was anticipated by business groups, who sometimes say non-competition clauses have positive implications, such as protecting confidential customer data and intellectual property. Ms Khan said in an interview with the Wall Street Journal in June that curbing the proliferation of non-compete clauses is an urgent task for the FTC.

The U.S. Chamber of Commerce said Thursday it is considering filing a lawsuit against the proposal if it passes. “We don’t believe they have the legal authority,” said Sean Heather, the Chamber’s senior vice president of international regulatory affairs and antitrust matters. “They know they are on very weak ground.”

In a lengthy discussion of the proposal released Thursday, the FTC estimated that eliminating non-compete obligations would increase workers’ incomes by up to $296 billion annually. Part of that value represents a transfer of income from firms to workers and from consumers to workers as firms raise prices because they need to raise wages to retain workers, the agency said.

President Biden asked the FTC 18 months ago to ban or limit clauses in employment contracts that restrict workers’ freedom to change jobs. Most states limit non-compete clauses or require the limitations to be reasonable, leaving them open to judicial interpretation. A handful of states, including California, say the clauses in employment contracts are unenforceable.

The rule, which would pre-empt many state laws, could have major implications for states like Georgia, which amended its law in 2011 to give companies more flexibility in using non-compete clauses.

State law generally allows two-year non-competition covenants for key employees, managers and other supervisors, sales personnel who deal with customers, and individuals who receive business or contracts for the company, said Neal Weinrich, an Atlanta attorney specializing in non-compete covenants and Trading concentrates secrets.

Employees bound by non-compete agreements generally don’t want to quit their jobs because they fear they’re violating the agreement with their employer or fear another local company won’t hire them, Mr Weinrich said. “Georgia is much more employer-friendly” than it was before the 2011 law change, he said.

The rule proposal marks the first time in decades that the FTC has embarked on a rulemaking project aimed at broadly prohibiting business conduct on competitive grounds. Some conservatives have argued that the FTC does not have the authority to write rules targeting anti-competitive practices.

“The rule proposes to regulate a significant portion of America’s economy through a non-compete prohibition,” Ms. Wilson wrote in the dissenting opinion. A rule “will undeniably destroy millions of private contracting agreements and affect labor relations in a variety of industries across the United States.”

The FTC’s proposal includes an exception to non-compete agreements between buyers and sellers of businesses. The restricted person would have to have owned at least 25% of the company, according to the FTC’s plan.

Federal regulators have faced headwinds from the courts in recent years over policies and enforcement tactics that some judges felt went beyond the agencies’ statutory powers.

Last year, in an advisory opinion on an environmental regulation, the Supreme Court said that when federal agencies make regulations with wide-reaching economic and political ramifications, the measures are presumed invalid unless Congress specifically authorizes the action.

Ms Khan has argued that the FTC has clear authority to write competition rules and has written that writing rules is a more efficient way of informing businesses and consumers of what the law allows. In the past, the agency has used its enforcement cases to show what acts or practices cross the line.

“There is very strong support for us to take this action,” Ms Khan said.

The FTC has also moved under Ms Khan to increase the way it uses enforcement to address unfair competition practices.

On Wednesday, the FTC announced settlements with several companies it said collectively required thousands of employees to sign non-compete agreements. The companies agreed to drop the rules and stop enforcing them against workers they accuse of violating the rule.

The FTC said one of the defendants, Prudential Security Inc. and Prudential Command Inc., required low-wage security guards to sign contracts barring them for two years from working for a competing firm within a 100-mile radius of their location work stationed for Prudential. Employees typically earned wages close to minimum wage, but Prudential’s restrictions said they would be fined $100,000 if they violated the non-compete clause, the FTC said.

Prudential Security and Prudential Command were jointly owned and based in Michigan but operated in multiple states, the FTC said. The companies’ owners sold their security business last year to another company that does not oblige employees to compete, the FTC said in a lawsuit. The owners of the security companies could not be reached for comment.

Non-competition clauses can affect workers who lose their jobs and are then unable to get a similar role because of the restriction. Alex Mumm, 28, said he was fired in September from his position as head of sales at Majic Plastics, an industrial recycling company in St. Charles, Illinois, with whom he had signed a non-compete agreement several years earlier.

Shortly after he got a new job in recycling, he said a Majic representative contacted him and threatened legal action. He quit the new job the same day, he said. He said it was difficult to find a job in his industry that didn’t violate the non-compete clause that has been in place for a year.

“It’s something I didn’t really think about until it happened to me,” he said. “Ultimately, it’s about people’s livelihoods, their lives and their families.”

Majic did not respond to requests for comment.

Authors: Dave Michaels at dave.michaels@wsj.com

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Source: Crypto News Deutsch

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