February 7, 2023

Noncompete Agreements

In January, “The U.S. Federal Trade Commission, which enforces antitrust law, proposed a rule that would ban companies from requiring workers to sign noncompete provisions as well as some training repayment agreements.” Reuters

“The U.S. Chamber of Commerce, which has indicated that it would oppose a broad rule banning most noncompete agreements for employees, asked the Federal Trade Commission [last] Tuesday to extend the comment period for the rule.” Reuters

A non-compete agreement is a legal agreement or clause in a contract specifying that an employee must not enter into competition with an employer after the employment period is over… Many contracts specify a certain length of time when the employee is barred from working for a competitor after they end employment.” Investopedia

See past issues

From the Left

The left supports the proposal, arguing that it will increase wages and worker mobility.

“[Noncompetes] began with a reasonable premise: Companies invest time and money to train workers, and they don’t want those workers to leave right away for a rival firm. But over time, noncompetes have become draconian, sidelining workers for longer periods of time and restricting employees from working in ever-larger geographical areas…

“Today, nearly 1 in 5 U.S. workers are asked to sign a noncompete during their onboarding for a new job. Even some hourly workers at fast-food chains have had to agree to these parameters. In an eye-popping example, workers who made sandwiches at Jimmy John’s had to sign noncompetes saying they would not take a job at a rival firm for two years. (The company was forced to drop it.)… If companies want to protect trade secrets, there’s a better way: nondisclosure agreements.”

Editorial Board, Washington Post

“[Noncompetes] depress labor market mobility and reduce wages and wage growth (regardless of whether employers can or do enforce them in court)… Economic analysis found that non-competes depress compensation for chief executive officers. If CEOs, who typically hire lawyers to negotiate their employment contracts and enjoy significant bargaining power, cannot protect themselves from the adverse effects of non-competes, what hope do the rest of us have?

Sandeep Vaheesan, Time

“A recurring theme in the public comments is medical professionals expressing frustration with noncompetes… ‘I previously worked in an underserved area of Ohio where patients had to wait over 6 months to see a medical specialist. My hospital job required a non compete of 20 miles,’ writes Florida physician Katherine Lu. ‘These non completes force physicians to leave the community and their patients if they want to leave their job. I personally had to move with my family to another state to work again after leaving.’”

Ken Klippenstein, The Intercept

“Non-compete agreements are such a blunt tool to use when more narrowly tailored tools can suffice… People will say, ‘Well, I need to train my employees, and I need to restrict their ability to leave after I train them so that I can recoup my training expenses.’…

“But here’s the issue: If you take a worker who has been trained and the non-compete has been used to justify that training expense, why does the non-compete agreement apply ten years into their tenure, or twenty years into their tenure, well after they’ve repaid the training expenses?…

“You just figure out how much you are going to have to spend on training the worker. If you’re going to send them to get an M.B.A., for example, you know exactly what that cost is, and then you just have a training-repayment contract that says, ‘Hey, we’re going to give you this much in training expenses. If you leave before a year or two, or whatever it is, then you have to pay back a portion of the training expenses that we didn’t recoup yet.’”

Evan Starr, New Yorker

From the Right

The right opposes the proposal, arguing that it will make companies less likely to train workers.

The right opposes the proposal, arguing that it will make companies less likely to train workers.

“The Federal Trade Commission’s ban on noncompete agreements may be the most audacious federal rule ever proposed. If finalized, it would outlaw terms in 30 million contracts and pre-empt laws in virtually every state. It would also, by the FTC’s own account, reduce capital investment, worker training and possibly job growth, while increasing the wage gap. The commission says the rule would deliver a meager 2.3% wage increase for hourly workers, versus a 9.4% increase for CEOs…

“There is strong bipartisan support for apprenticeship programs and other ‘work-based learning’ in which employers give the training and education that many universities fail to provide. These programs equip workers not only for the job at hand but for productive careers. Yet the FTC, with seeming indifference, projects that its proposal will reduce these opportunities, since companies are less willing to invest in workers who may take their know-how to a rival.”

Eugene Scalia, Wall Street Journal

“In its more than 100-year history, the FTC has never enforced a rule to regulate competition, and Congress never intended the agency to have that power. Instead, legislators gave the FTC authority to identify on a case-by-case basis individual acts that constitute unfair competition… Before issuing the proposed noncompete ban, the FTC issued a radical reinterpretation of the agency’s authority

“The minds of progressive activists must be running wild with ideas of what they could do if this approach is allowed to stand. Don’t like the pay gap between executives and nonexecutives? The FTC could simply declare it unfair and regulate it. Think that businesses above a certain size shouldn’t be allowed to get any bigger through mergers? The FTC could simply declare those businesses can’t make acquisitions.Sound far-fetched? Like the banning of noncompetes, both of these policies have been put forward by Sens. Bernie Sanders and Elizabeth Warren.”

Suzanne P. Clark, Wall Street Journal

“My first non-compete agreement secured me a well-paying job that trained me to become a skilled technician. Thanks to the Federal Trade Commission’s new plan to ban non-compete agreements, low-skilled workers trying to break into the trades won’t have the opportunity I did…

“No employer would want to take the risk of hiring an untrained worker, training them, and sharing important client information with them if they had no guarantee the employee would stick around. Without contractual obligations, what’s to keep a rival business from poaching valuable, newly trained workers? What’s to keep an ambitious worker from accepting paid training and then striking out on his own, undercutting his employer and taking his clients?…

“Trade school costs between $3,600 and $16,000, and graduates often still need more training. Do we really want low-skilled workers to have to bear that expense?

Jeremiah Ludwig, The Federalist

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