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The right to compete
In the United States, about 30 million people are subject to noncompete clauses, which "block people from working for a competing employer, or starting a competing business, after their employment ends." According to the Federal Trade Commission (FTC), noncompete clauses "restrict workers from moving freely" and give employers "the power to suppress wages and avoid having to compete to attract workers." Overall, the FTC estimates that noncompete clauses reduce worker earnings by $250 billion to $296 billion per year — or just under $2,000 per family.
Even if you are not subject to a noncompete clause, the existence of noncompete clauses may suppress your compensation. Noncompete clauses harm all workers by preventing jobs from opening in their industry. That means the competition for the labor of all workers is reduced, driving down wages.
Last week, the FTC proposed a new rule that would ban noncompete clauses in the United States. All existing noncompete clauses would be rendered null and void. And companies would be required to notify their employees that they are no longer be prohibited from pursuing employment from competitors. If the rule is adopted and upheld by the courts, it would be one of the most dramatic expansions in worker rights in decades.
Noncompete clauses were initially only used for high-ranking executives with access to valuable trade secrets. But, in recent years, the use of noncompete clauses has exploded. Today, "fast-food workers, arborists and manual laborers," making little more than minimum wage, are routinely required to sign noncompete clauses as a condition of their employment.
In 2021, the Wall Street Journal reported how a noncompete clause was deployed against a security guard:
In early 2017, Michael Kenny found work as a nighttime security guard at Critical Intervention Services Inc., a Florida housing development. A few weeks after accepting the job, which paid around $11 an hour, his overnight child care fell through. Mr. Kenny, a single father, resigned.
Months later, he took a job as a daytime security guard at a bank making almost $15 per hour. He said that soon after he started, his boss informed him that his previous employer had sent a letter stating Mr. Kenny had signed a two-year noncompete clause as part of his employment contract. His new employer let him go.
Kenny did not even recall agreeing to a noncompete clause. His experience is typical. A 2011 study by an M.I.T. professor "found that employers typically presented workers with noncompete contracts when the employees lacked negotiating leverage, on their first day at work, for instance."
The FTC says it has existing authority to ban noncompetes under Section 5 of the FTC Act, which prohibits "unfair methods of competition."
The FTC's proposed rule will face stiff opposition from corporate America, which benefits from locking in valuable employees at lower wages. The Chamber of Commerce, a corporate lobbying group representing virtually every major U.S. company, issued a statement oddly claiming noncompete clauses "preserv[e] competition."
The Chamber of Commerce statement also claims "noncompete agreements are an important tool in fostering innovation." But California, which has banned noncompete agreements since the 19th Century, undercuts that argument. As Matt Stoller notes in the BIG newsletter, "California’s ban on non-competes… was a key reason for Silicon Valley’s success." According to historian Margaret O’Mara, in the 1970s, "Massachusetts was wealthier, better connected and more technologically advanced." But Massachusetts had noncompete clauses which meant "the porous information ecosystem of engineers changing companies that led to lots of companies in Silicon Valley never developed."
Other states that restrict noncompete clauses include: Colorado, Illinois, Maine, Maryland, New Hampshire, North Dakota, Oklahoma, Oregon, Rhode Island, Virginia, and Washington.
A 2011 study found that "enforcement of noncompete clauses significantly impedes entrepreneurship and employment growth." Noncompete clauses don't just prevent workers from moving to another company; they prevent workers from starting their own companies. States that limit noncompete clauses ended up with more patents, more firm starts, and more employment.
Nevertheless, the Chamber of Commerce called the FTC proposal "blatantly unlawful" and, if the FTC proceeds with the rule in its current form, it is likely to be challenged in court. The Supreme Court may be sympathetic to corporations that wish to continue enforcing non-compete clauses. Specifically, the current Supreme Court has embraced the "major questions doctrine," which is the belief that "Congress must speak clearly when empowering agencies to regulate issues of vast significance." The Supreme Court invoked the previously obscure doctrine last year to "invalidate the EPA’s Clean Power Plan."
FTC Chair Lina Kahn said the agency was acting well within its authority. "In addition to the text of the statute, the structure and purpose of the statute, legislative history all support the authority that we’ll be exercising," Khan said. She cited "the D.C. Circuit’s 1975 decision in National Petroleum Refiners Ass’n v. FTC, in which the court said the commission has authority to issue competition-related rules."
The crackdown begins
Along with the proposed rule, the FTC announced an enforcement action against several companies exploiting workers with noncompete clauses. The actions represent "the first time that the agency has sued to halt unlawful noncompete restrictions."
One case involves a Michigan-based security firm, Prudential Security. According to the FTC, Prudential Security's standard noncompete clause prohibited employees "from working for a competing business within a 100-mile radius of their job site with Prudential for two years after leaving Prudential." While Prudential Security's "guards typically earned hourly wages at or near minimum wage," the noncompete clause "required employees to pay $100,000 as a penalty for any alleged violations of the clause."
A Michigan court found that Prudential Security's noncompete clause was "unreasonable and unenforceable under state law" but the company continued "to require all of their security guard employees to sign them." The FTC's order prohibits Prudential Security "from enforcing, threatening to enforce, or imposing noncompete restrictions on any current or past workers." Further, the company is "required to notify all affected employees that they are no longer bound by noncompete restrictions."