FTC Bans Non-Compete Agreements: Restricting Workers’ Freedom Hurts the Public

FTC Bans Non-Compete Agreements: Restricting Workers’ Freedom Hurts the Public

This week, the Federal Trade Commission issued a rule that, once effective, will prohibit employment agreements that limit an employee’s ability to work for other employers or start their own businesses.  This is good news for approximately 30 million workers currently subject to non-compete agreements, as they will not be trapped by employer restraints in jobs that underpay, underpromote, or otherwise undervalue employees’ work.  In issuing the rule, the FTC follows California and other states, which recognize that not only individual employees but the public at large are hurt by non-compete agreements. The public benefits of a freely moving labor force have not deterred a major business organization from vowing to sue to stop implementation of the rule.  Restricting workers’ freedom to choose their jobs is not a legitimate business decision and the rule must take effect without delay.

The FTC proposed the new rule in January 2023, and considered empirical research and public comment before reaching the final rule announced this week.  The final rule prohibits any employment agreement clause that prohibits a worker from seeking or accepting any work with a different employer, or starting a business on her own, if that work would begin after the worker’s employment with the employer who provides the agreement—employers can still order an employee not to moonlight during her employment.  (16 C.F.R. §§ 910.1, 910.2.)  The rule forbids enforcement of existing non-compete clauses, except against certain employees defined as “senior executives” who received compensation above a certain threshold and occupied a policy-making position.  Once the rule takes effect, new non-compete clauses will be barred as to senior executives as well.

Non-compete clauses hurt individual workers by limiting their mobility.  A worker whose skills qualify her to work in a specific job—as a bartender or a technical consultant for architectural firms, for example—may accept a position and sign an agreement not to compete with her employer, only to find herself unable to leave a job with poor supervision, a mediocre salary, or untenable working conditions.  Such an employee risks legal action and related costs if she leaves her job.  Sometimes the consequences of a non-compete clause can be devastating for employees.  One commenter told the FTC that they had worked as a bartender for a large company that owned and operated more than twenty bars.  Shortly after they started working, they were sexually harassed at work and began looking for a new job.  When they found one and began work at a nearby family-owned bar, their former employer sued them.

Another commenter found themselves laid off for economic reasons; when they eventually found a job at another company, the company that laid them off threatened their would-be employer.  To find work, that commenter was forced to start over in another industry.  (Final Rule, pp. 11-12.)

In scenarios like these, employers can reap unfair advantage not only by paying their workers below-market wages, but by stymying others’ efforts to participate in an industry.  When that happens, the public is harmed.  For example, one commenter who works in the asphalt industry reported that their employer provided sub-par products to customers.  The commenter wished to start their own asphalt business to provide better service at lower cost but, constrained by a non-compete clause, was unable to do so—precisely the anticompetitive and unfair result that the FTC rule aims to prevent.

Non-compete agreements have serious public health implications, too, because of widespread use in the healthcare industry.  This can be especially pernicious in rural areas, where a community may be served by only one employer and, as one commenter put it, “providers with aggressive non compete clauses must abandon the community that they serve if they cho[o]se to leave their employer.”  (Id., p. 11.)

Fairness demands that workers be free to decide where to contribute their labor.  Tying up workers’ skills and talents is bad for everyone.  The FTC’s rule is an important protection for workers and the public at large.

If you have questions about an employment agreement, please contact Bryan Schwartz Law, P.C.