FTC Prepares to Ban ‘Non-compete Agreements’ – What They Are and Why

Non-compete agreements may infringe labor rights, according to the FTC.
Non-compete agreements may infringe labor rights

Most American workers are hired “at will:” Employers owe their employees nothing in the relationship except earned wages, and employees are at liberty to quit at their option. As the rule is generally stated, either party may terminate the arrangement at any time for a good or bad reason or none at all.

In keeping with that no-strings-attached spirit, employees may move on as they see fit – as record numbers of have done during the “great resignation” – unless, that is, they happen to be among the tens of millions of workers bound by a contract that explicitly forbids getting hired by a competitor. These “noncompete clauses” may make sense for CEOs and other top executives who possess trade secrets but may seem nonsensical when they are applied to low-wage workers such as draftsmen in the construction industry. A 2019 business survey found that 29% of companies paying an average wage of less than US$13 an hour required all their employees to sign noncompete agreements.

President Joe Biden seems to agree about the oppressive nature of noncompete contracts. After he pressed the Federal Trade Commission to ban or limit them in 2021, the agency said on Jan. 5, 2023, that it plans to do just that. The FTC estimates that banning noncompetes could lift worker wages by nearly $300 billion per year.

As a scholar of employment law and policy, I also have many concerns about noncompete clauses – such as how they tend to aggravate the power imbalances in relationships between workers and bosses, suppress wages and discourage labor market mobility.

The birth of at-will labor

Courts began to enshrine the at-will doctrine in the 19th century, making exceptions only for employees with fixed-term contracts. In L. Payne v. the Western Atlantic Railroad Co., the Tennessee Supreme Court ruled that a railway foreman in Chattanooga had the right to forbid his workers from buying whiskey from a merchant named L. Payne.

Payne had sued the railroad, claiming it couldn’t threaten to fire employees to discourage them from buying goods from a third party. The court disagreed, arguing that the railroad had a right to terminate employees for any reason – even one that involved dealing with a independent merchant.

The notion of at-will employment and its associated lack of job protections soon rose to the level of constitutional mandate. The 1894 Pullman strike, which disrupted national rail traffic, prompted Congress to pass the Erdman Act four years later. That law guaranteed the right of rail workers to join and form unions and to engage in collective bargaining.

But the Supreme Court struck down that law in 1908. Writing for the majority in Adair v. United States, Justice John Marshall Harlan explained that since employers were free to use their property as they wished, they could impose and enforce their own labor rules. Employees, in turn, were free to quit. The court summarized the law with the following statement:

“The right of a person to sell his labor upon such terms as he deems proper is, in its essence, the same as the right of the purchaser of labor to prescribe the conditions upon which he will accept such labor from the person offering to sell it.”

That might sound reasonable, but the Adair ruling led to the proliferation of “yellow dog” contracts threatening workers with firing if they joined or organized unions. The term disparaged people who were willing to accept such conditions, but the principle had widespread legal approval.

For three decades, the at-will doctrine stymied legislation that would have protected labor rights. Even when a supervisor tried to seduce a longtime employee’s wife and fired the employee in revenge, courts refused to protect the man from losing his job.

Labor rights and the law

With the passage of the National Labor Relations Act in 1935, all private-sector workers and unions gained the power to collectively bargain with employers. Subsequent labor agreements, such as the one negotiated by the Steel Workers Organizing Committee with Carnegie-Illinois Steel in 1937, made employers prove “just cause” before firing any person covered by the contract.

The Civil Rights Acts of 1964 and 1991 added employment protections prohibiting discrimination based on race, gender, religion and national origin. And the Americans with Disabilities Act, which Congress passed in 1990, ensured that people with disabilities would have access to jobs with or without reasonable accommodation.

Those laws and other measures, including modern exceptions to the at-will rule, offer workers some security.

But they provide no federal protection from noncompete clauses.

Noncompetes and low-wage labor

It’s unclear exactly how many U.S. workers are subject to a noncompete. An FTC estimate in 2020 put it at 16% to 18% for all workers, while the Economic Policy Institute suggested in 2019 that 28% to 47% of all private-sector workers are subject to one.

The leeway for employers to impose these provisions varies widely from state to state and is in flux.

California, North Dakota and Oklahoma are the only states to ban them outright, while about a dozen forbid them for certain types of low-wage workers. Washington, D.C. also outlaws all noncompete agreements. Some research shows wages have risen following laws limiting the agreements.

At the same time, some states, such as Georgia and Idaho, have made it even easier for companies to enforce them.

Critics have pointed out the disadvantages of noncompete clauses to unskilled labor.

“By locking low-wage workers into their jobs and prohibiting them from seeking better-paying jobs elsewhere, the companies have no reason to increase their wages or benefits,” former Illinois Attorney General Lisa Madigan said when she sued the Jimmy John’s fast-food franchise in 2016 for making its employees sign noncompete clauses.

The chain subsequently agreed to drop its noncompetes, which had also come under fire in New York. The clauses had barred the sandwich-maker’s workers from working for other companies that earn more than 10% of their revenue from “submarine, hero-type, deli-style, pita, and/or wrapped or rolled sandwiches” for two years after leaving the Jimmy John’s payroll.

Efforts to limit noncompete clauses

Given the patchwork of state laws – and reports that companies are using noncompetes even in places where they are banned – a uniform federal rule could clarify the situation and benefit both employees and employers.

The FTC will make its proposed rule final after accepting public comments for 60 days. The rule would take effect 180 days after it becomes final, assuming no legal challenges delay it.

Executives who sign noncompete clauses already get these kinds of protections, not to mention lucrative buyout provisions.

If employees with lower pay and less prestige aren’t free to get new jobs, I believe their bosses have a corresponding duty to extend to them the rights enjoyed by people at the top of the corporate ladder, particularly independent third-party dispute resolution.

This article was updated with the FTC’s decision to propose a noncompete ban.The Conversation

Raymond Hogler, Professor Emeritus of Management, Colorado State University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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