Markael Butler
Associate Editor
Loyola University Chicago School of Law, JD 2024
The Federal Trade Commission (FTC) recently proposed a ban on non-compete clauses in contracts between employers and their employees. The FTC estimates this ban could increase American earnings in the range of $300 billion per year, while also allowing for lateral movements across business sectors and more career opportunities for employees. The FTC’s primary mission is to protect both competition and consumers with this proposed ban. Through Section 5(a) of the FTC Act, the FTC has the power to investigate and prevent unfair methods of competition and unfair or deceptive acts or practices affecting commerce.
Bargaining power
The FTC’s proposal would create a huge shift in the balance of bargaining power. As of now, the balancing scale weighs heavily in the employer’s favor. It isn’t surprising to see non-compete agreements in high level executives’ contracts, as companies are trying to protect their intellectual property. Companies, however, have also added these agreements into low-wage and middle-class employee’s contracts, regardless of their lower positioning in a company. Companies might also feel as though they have spent a significant amount of time and resources to onboard and train employees, so, they don’t want the talent they invested in to leave and go straight into the doors of competitors. However, not many, if any, low-wage, or middle-class employees hold, nor even have access to, important company trade secrets.
This broadly used tool continues to pose a threat to the labor market by hampering innovation, wages, competition, and more. As stated above, the FTC estimates the suppression of non-compete clauses will increase wages. The increase in wages may come from the fact that if employers want to keep talent, they will have to actually incentivize workers to stay, hence they will have much more to consider when employees ask for salary increases. Pay isn’t the only driving factor for employees, as they also consider their work life balance, the company atmosphere, and many other components while choosing a place to work. With this proposed ban on non-competes, employees may see a dramatic shift in their bargaining power come time to negotiate with their employer.
Balancing interest
The FTC understands the concerns that businesses have about protecting their intellectual property. Yet, they also understand the importance of giving employees freedom and the opportunity to take on new roles in different settings, even if they stay in the same industry. Since no formal memo of what this ban will look like has been released yet the FTC must make sure to take into account the interest of both parties.
An alternative compromise would be to allow non-compete clauses for high-level executives and anyone else with access to proprietary information. Non-compete clauses in low-wage workers contracts are simply outrageous and unnecessary. If a restaurant worker must wait two years in order to be able to go work at another restaurant, the opportunity that they once had could be long gone, hampering growth potential for that employee. Not only has growth slowed due to non-competes, but they have also suppressed innovative solutions.
Non-compete agreements not only prohibit employees from transferring to competing companies for a certain period of time, but they also don’t allow employees to build their own startups for a certain period of time. This has a negative effect on the labor market as well. Since the government doesn’t necessarily create new jobs outside of the public sector, which is very limited; that creation comes from the innovation of individuals taking advantage of government incentives, through tax cuts and monetary policy, to create new jobs and hire workers. These businesses eventually grow and hire more and more talent, ultimately affecting market prices of goods and services.
The road to come
The FTC will have a lot to consider as they hear from the public and contemplate how they could implement this proposal. Fortunately, the FTC does not have to start from scratch. Oklahoma, California and North Dakota have statutes that make non-compete clauses void, with some exceptions. There are also states that have restrictive covenant statutes that make non-compete clauses invalid based upon the employee’s earnings, notice, level, etc. Additionally, some state courts have prohibited non-competes if the injury to the public is greater than the employer’s benefit or they fail to meet certain criteria. For example, in Hawaii non-compete agreements are allowed only if the provision is “ancillary to a legitimate purpose” and “reasonable.”
Further, the FTC looks to section 5(a) of the FTC Act to find authority to act without congressional approval. Additionally, the act gives the FTC the ability to implement trade regulation rules, allows the commission to publish reports and make legislative recommendations to Congress about issues affecting the economy. However, the FTC will face opposition on the scope of its rulemaking authority. The U.S. Chamber of Commerce (Chamber) believes the FTC is overreaching its authority and challenges if section 5 of the FTC Act actually grants such regulatory powers. The chamber is prepared to sue the FTC should they effectuate this proposal, as the chamber believes this rule would be “blatantly unlawful.”