The proposed rule could have massive ramifications for the U.S. economy, raising wages and increasing competition among businesses, economists say.
Jeffrey Greenberg––Universal Images Group via Getty Images
January 9, 2023 2:30 PM EST

The Federal Trade Commission (FTC) has proposed a new regulation that would block companies from forcing employees to sign noncompete clauses that threaten legal action if they join a competitor or start their own competing business.

Roughly 30 million people—about one in five American workers—are bound to noncompete clauses across a variety of jobs, including hairstylists, doctors, and even sandwich makers. These workers are often forced to remain in their current jobs, which may pay less than other companies, or risk being shut out of their industry altogether.

The FTC rule, proposed on Jan. 5, could have massive ramifications for the U.S. economy, raising wages and increasing competition among businesses, economists say.

“Noncompetes are basically locking up workers, which means that they’re not able to match with the best jobs for them,” FTC Chair Lina Khan said on a call with reporters. “If this rule were to be finalized and go into effect…[it] would force employers to compete more vigorously over workers in ways that should lead to higher wages and improved working conditions, basically injecting competition into the labor market.”

Job applicants and current employees can take a number of steps to ensure they don’t become shackled to a noncompete agreement they may later regret. The short answer is to negotiate with your employer during the hiring or promotion process and read the fine print carefully before signing a binding contract.

“It’s important to know your rights,” says Aaron Bibb, an employment lawyer at Hawks Quindel who regularly represents workers in employment disputes. “A lot of times companies don’t even care whether noncompetes are legally enforceable or not—it’s the threat of enforcement that really gives them their power.”

Here are some tips on what to do if you’re subject to a noncompete agreement.

Understand the consequences

Economists say the growth of noncompete agreements in recent years is part of a broad shift in which companies assert ownership over work experience.

Dylan Ilvento recalls reading through his contract for a college internship at an app developer when he noticed something strange: The contract included a two-year noncompete agreement that would prevent him from leaving his internship for a competitor. These provisions have long been routine among senior executives who may possess trade secrets, but Ilvento never imagined having to sign one as a low-wage college intern.

“I was given the contract to sign on my first day of work, so I was definitely blindsided by it,” Ilvento, now 31, tells TIME of his experience. “I asked my manager about it and they just fed me a very nonchalant ‘it’s standard in the industry’ line.”

Ilvento signed the contract, though he now says he didn’t understand at the time that it could have stopped him from finding better work in the future. He ended up interviewing with some competitors of the company, but got lucky that it did not stop him from getting a job. “It did bring me a lot of stress,” he says.

He urges anyone asked to sign a noncompete agreement to carefully weigh the pros and cons, and to get in writing what the organization considers its competitors to prevent a lawsuit.

Find leverage to negotiate

Some job applicants may be able to negotiate with their employers to remove noncompete language from their contract. Typically, only high-level recruits or in-demand applicants will be able to negotiate the terms of their contract, but employment lawyers say it’s worth a shot for anyone whose employer wants to tie them to a noncompete agreement.

“Employees don’t always think about these things when they’re hired because they might feel like they’re going to be there forever,” Bibb says. “But if you’re going into a job where you have any leverage for negotiation, noncompete agreements can be negotiated. Whether the employer is willing to negotiate is another question.”

Even if an employee is currently entered into a noncompete agreement, it might not be too late. Peter Rahbar, an employment lawyer who helped advocate for the ban of noncompetes for lower income workers in New York, says employees could also try negotiating on their way out of a job. “Employees might be told on their way in that noncompetes are standard and if they change it for you they have to change it for everybody,” he says, “but what ends up happening is you can negotiate on the way out too.”

Employees may be able to add specific exceptions to their noncompete agreements if they ask, particularly with respect to geography or time frame. For instance, a hair salon may be willing to allow employees to leave for a competitor if it’s located more than 50 miles away or in a different state.

Consult an attorney

Employees can also take legal action to fight noncompete agreements. Some states have rules that limit the scope of noncompetes. California has a complete ban on the clause. Consulting an attorney can help employees better understand their rights and the terms of their contract, Bibb says.

“We do a lot of consultations with folks who want an attorney to review their noncompete and give them advice on what’s the likelihood of the employer taking action and being successful,” he says.

Some employers might not enforce the policy strictly—such as a sandwich shop that pays minimum wage—but it’s common for tech companies to take employees to court if they join a competitor despite signing a noncompete agreement, particularly if trade secrets are involved. A noncompete agreement can sometimes also have a financial component attached to it. Employers may attach significant stock grants or another compensation opportunity to the contract, and those who leave for a competitor risk losing that money.

But taking legal action can be expensive and potentially harmful to your career—trapping you in a lose-lose situation. Prospective employers are more likely to hire candidates who aren’t bound by a noncompete agreement due to the possibility of legal action. “It becomes an obstacle for a lot of workers trying to move,” Rahbar says.

Bibb adds: “A lot of times, if you have to go to court you’ve already lost because you have to pay an attorney. And you might cause a big kerfuffle with your new job. They might decide it’s more trouble than it’s worth to bring you on.”

Submit a public comment to the FTC

While the FTC has taken a firm stance on noncompetes, the prospect of a ban has been met with resistance from some parts of the business community. Experts say the regulatory process could also get delayed by legal challenges.

Matt Kent, a competition policy advocate with the government watchdog group Public Citizen, says that workers who support the ban on noncompete agreements should share their experiences with the FTC, particularly if they have been negatively affected by the clause.

“It’s very important that people tell their stories to the FTC to really strengthen their resolve and make it clear there’s a real reason for these rules,” he says. “And it’s pretty easy to do it, so people should definitely take part in the Democratic aspect of the regulatory process.”

The public will be allowed to submit comments on the proposal via the FTC’s website for 60 days, at which point the commission will review the comments, make changes and finalize the rule. It would then take effect 180 days later—unless there are legal challenges.

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Write to Nik Popli at nik.popli@time.com.

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