Washington regulators are busy again. The Federal Trade Commission recently announced a federal ban on noncompete agreements in the U.S. Not only would future noncompete agreements be prohibited, but noncompete agreements already in place would be voided.
Such a sweeping move is yet another example of the Biden administration attempting to micromanage workplaces in the name of worker mobility and opportunity. Millions of workers bound by noncompete agreements may enjoy the ability to quit.
However, the FTC is overriding state laws and undermining bedrock principles of free enterprise in what is certainly going to be challenged as unconstitutional.
What happened
In a 3-2 vote, the FTC approved a new rule to ban noncompete agreements for all workers and makes those currently in place unenforceable except for those covering senior executives. A “senior executive” is defined by the FTC regulation as someone who earns more than $151,164 annually and is in a “policy-making position.” Employers are also required to inform their employees that current noncompete clauses are unenforceable.
The rule follows a 2021 directive from President Biden targeting anticompetitive practices that called for banning or limiting noncompete agreements as a way to help boost wages. Perhaps the thinking is that individuals could more easily leave employers in search of greater pay if they were not bound to a noncompete agreement.
The ban is set to go into effect in August unless delayed or struck down by Courts.
Noncompete agreements are typically-–and understandably—the jurisdiction of states. Currently, California, Minnesota, Colorado, North Dakota and Oklahoma have all banned or nearly banned noncompete agreements. Several other states restrict the agreements in different ways such as limiting them to workers of a certain threshold or time period.
What it means for me
The FTC believes that millions of workers will be freed from noncompete agreements—and not just executives but low-wage and middle-level workers. A 2022 research study found that noncompete agreements had a chilling effect on women starting rival businesses.
A Wall Street Journal article shares stories of women who feel they have been held back by noncompete agreements:
Holly Clark, a hairstylist based in St. Petersburg, Fla., said she encountered a noncompete clause after high school when she looked for a job at a spa. She objected to the restriction and didn’t take the job, even though it would have offered better benefits than positions at smaller salons.
Clark, who now runs her own salon, says noncompetes have made it difficult to bring in employees because so many workers are covered by them.
“Everybody’s locked down by contracts,” Clark said. “I’m very successful because I did not get stuck in a noncompete.”
Sabrina Parris, a tax consultant in Hickory, N.C., signed a noncompete agreement early in her career that blocked her from working with former clients if she left her then-employer, an accounting firm. When she departed, hoping to start her own business, the employer reminded her of that contract, she said.
After she started the company, which helped small businesses with tax compliance, she turned down former clients when they reached out. “I told them I couldn’t work with them, and that they were in good hands and should stay where they were,” said Parris, who said she also drove Uber on nights and weekends to supplement her income. “The noncompete scared me a little.”
Noncompete agreements do serve important business purposes. They protect trade secrets or other confidential information employees might learn while employed for a company. This is especially important in small businesses, where employees who are exposed to all parts of an operation.
Even if the ban is upheld, experts say that employers can use other means to protect their intellectual property such as nondisclosure agreements.
Even if banning noncompetes has merit, was the FTC within its power to do so? Courts will answer that question. The two Republicans on the FTC, who provided dissenting votes on this rule, don’t believe that the agency has the power to invalidate noncompete contracts across the country. They thought the FTC lacked clear permission from Congress for such a sweeping ban.
Writing in National Review Dan MacLaughlin opined ban undermines a fundamental safeguard of our economic system:
Freedom of contract in employment is vital to free markets and has been a principle of the free-labor Republican Party since its foundation. The sanctity of contracts was also crucial to the Framers, which is why the Constitution contains the contracts clause: “No State shall . . . pass any . . . Law impairing the Obligation of Contracts.” That said, noncompete clauses test the limits of that principle because they can constrain the free movement of labor and prevent workers from leaving to start their own businesses.
As a result, there have long been legal limits on when courts can order an employee to keep working for an employer whom he wishes to leave or effectively preclude him from practicing his profession.
The Courts will have to sort out whether the FTC went too far. Cases have already been filed by the Chamber of Commerce and other business groups as well as a national tax services firm.
Bottom Line
Noncompete agreements are a tool that can protect employers but at the same time limit opportunities for employees. The question is not whether they should be regulated but who should do it. There may be valid reasons for states, with knowledge of local industries and economies, to limit or ban noncompete agreements to ensure that workers, especially low-income workers, can move from one job to the next.
However, a federal agency trampling on state law and in many cases, imposing new regulations will undoubtedly be ruled invalid government overreach. We look forward to observing how this fight unfolds.