President Joe Biden signs an executive order on “promoting competition in the US economy” at the White House on July 9, 2021.
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The Biden administration wants to curb the use of abusive non-compete agreements by companies.
A non-competition is a legal contract between an employer and an employee. Typically, companies use them to prevent workers from accepting a job with a competitor for a certain period after employment. Companies typically use them as a backup, to protect trade secrets and proprietary information.
President Joe Biden called on the Federal Trade Commission to draft a rule to “limit the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit the mobility of workers.”
The directive was part of a broad executive order issued this month to promote competition in the U.S. economy.
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About 16 to 18 percent of American workers are subject to a non-compete clause, according to FTC commissioner Rebecca Kelly Slaughter.
At this point, 30% to 40% are asked to sign a non-compete notice after accepting a job, often on the first day on the job, Slaughter, a Democrat, said in a speech last year. This is a concern for workers who have no bargaining power and have no choice but to sign, she added.
Reduced bargaining can lead to lower wages, cause workers to quit their profession or field altogether and reduce churn, which can prove detrimental to the U.S. economy, according to a released Treasury Department policy report in 2016.
About 12% of those who earn less than $ 20,000 a year and 15% who earn between $ 20,000 and $ 40,000 are subject to agreements, according to Slaughter.
However, while non-competition can hurt workers in some contexts, there is also some evidence of some benefits, Noah Joshua Phillips, another of the five FTC commissioners, said in a speech last year.
For example, by reducing the likelihood of workers leaving, employers may be more willing to provide expensive training, according to the Treasury report. And employers with high turnover costs can use them to match employees who are reluctant to change jobs later.
Phillips, a Republican appointed to the Commission, also expressed doubts about the legal basis for drafting a rule around non-compete clauses.
“To the extent that the regulation in question relates to ‘unfair competition methods’, the way we operate may involve not only the policy of non-competition clauses, but also more fundamental questions concerning the Constitution and its separation of powers. “he said in a statement. speech from last year.
Many states already have rules to limit the use of non-competition, according to a National Law Review article written by law firm K&L Gates.
In California, for example, non-competition is generally “null and void,” according to the firm. And, increasingly, states like Illinois, Maine, Maryland, New Hampshire, Rhode Island, and Washington prohibit employers from using them with low-wage workers.