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Jan 19, 2023

Non-compete agreements.

For employees hoping to switch jobs, and transfer their experience to rival businesses, they’ve long been a source of frustration and consternation.

Critics have long argued non-compete agreements deny people their legitimate right to apply their professional skills elsewhere.

Others argue they are even more pernicious than this – arguing they reduce workers’ mobility and significantly suppress wages by preventing them to take on roles in fields they have a proven a track-record in.

And now, it seems the Federal Trade Commission (FTC) agrees.

On 5th January it proposed banning non-compete agreements on workers in their entirety. It’s basing its announcement on a preliminary finding that argues non-competes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.

Not only does the FTC claim non-compete agreements are exploitative [many staff are coerced into signing them as a precursor to being hired in the first place], but it also agrees they reduce people’s earning power. And, just as seriously, it also says they also hamper innovation, by blocking people from starting new businesses.

The FTC’s own data suggests that around 18% of all US workers (some 30 million people), have to abide by non-compete agreements. If they were outlawed though, workers would collectively earn $300 billion more per year, while racial and gender pay gaps could close by between 3-9%.

Employers have until 10th March to submit their objections – and submit them they surely will. This is one employment practice they don’t want to see go.

So what is the likelihood of the ban going through?

How will it impact employers?

And what does it mean for employment contracts more generally?

TLNT sat down with Leonard Samuels, partner at Berger Singerman LLP to hear what his assessment is:

Q: How have we’ve got to where we are?

A: Non-compete agreements have always been contentious. They are already governed against to some extent in 15 states – with California being one state that already outlaws them. Recently the problem has been that more companies have been using them more of the time. But what’s really turned the tide, I think, was the recent case of a sandwich chain – Jimmy Johns – trying to enforce non-competes on their delivery drivers. People were literally asking ‘what’s going on here?’ The case, in 2016, highlighted how far non-competes seemed to be going. Initially they were brought in to stop high-level executives taking sensitive information to rivals. The sandwich seller case dramatically showed how things were now perceived to have gone too far. In the years since, states have done their own thing to limit them – for instance the state of Washington bans them for anyone earning under $100,000. But there’s been growing pressure to have nation-wide legislation – of which this is now the suggestion.

Q: What’s the likelihood of the proposal passing?

A: I think it’s quite strong. The Biden administration, from the get-go, has said it is opposed to non-competes, and so the prospect of the rule passing is quite strong. Assuming any amendments are dealt with, and it passes legal challenges, the rule could become legislation by the year-end.

Q: What’s your feeling about the strength of employer opposition to it?

A: There’s no doubt employers will challenge. They will point to the fact that while there are studies showing non-compete agreements suppress wages, there are also others that come to a different conclusion. But more than this, from the employer’s perspective, they see non-compete agreements as a protection against risk. They have legitimate concerns that employees with access to confidential information could then pass it on to rivals. They also have concerns that employees could take clients with them, and that money they’ve invested in training could go straight out of the door. So there’s a lot at stake for them. There’s so-far been a suggestion that the FTC – just in proposing the rule – is going beyond its authority. So this could be an area we see challenges.

Q: If it does go through, what then for employers?

A: Some things are still quite clear. If the rule passes, things like non-disclosure and non-solicitation agreements won’t be covered, and will still be allowed. This will protect employers from their sensitive information being spread, or from people trying to poach other members of their team. However, the big one is that in theory, if the rule passes, the intention is for legislation be retrospective in nature – effectively meaning all existing non-compete agreements hold no water, and that basically all existing contracts of employment are void.

Q: Is there any other recourse/measures employers could take to get round any new legislation?

A: It’s possible we’ll see more use of things like deferred compensation written into employment contracts – which have the effect of keeping people in the organization longer. Broadly speaking, all employers must, as a priority, look at the terms of all their employment contracts, because they will surely now need changing.

Q: Can’t employers see the benefit of this change? Won’t employers benefits by having people join ‘them’ from their rivals?

A: in theory you might think this, yes. Companies that don’t use non-compete agreements will say they don’t use them for this very reason. And tech companies in California have been very successful, despite the lack of non-compete agreements. But overall I think there are still very real concerns about employees taking secrets with them. So employers do need to prepare for the likely change they’ll face by the end of the year.

In short: Banning non-compete clauses:

Proposed changes will mean:

  • It is unlawful for employers to enter into or maintain non-compete agreements with their workers.
  • It would require employers to void any such agreements that already exist within 180 days of the date the rule is published in the Federal Register.
  • The rule would apply broadly to all workers, whether paid or unpaid. Workers would include employees, independent contractors, interns, volunteers, apprentices, and sole proprietors.
  • The proposed non-compete ban would generally not apply to other types of employment restrictions, such as non-disclosure agreements to protect confidential information.
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