Federal Trade Commission BANS Non-Compete Agreements

Another Musing Here At The Wealthy Ironworker

For today’s musing, we are taking a look at all things non-compete. The reason?

The Federal Trade Commission (FTC) voted to ban the use of non-compete agreements on Tuesday, April 23. THAT’S BIG.

What is the Federal Trade Commission (FTC)?

The Federal Trade Commission (FTC) is an agency created back in 1914 as part of the effort to “bust the trusts.” They are one of the agencies you hear about when the federal government takes monopolies to court.

Its mission: “Protecting the public from deceptive or unfair business practices and from unfair methods of competition through law enforcement, advocacy, research, and education.”

What are Non-Compete Agreements?

These are taken away by non-compete agreements

The National Employment Law Project defines them:

“Non-compete agreements are clauses in employment contracts that prevent workers from working for “competitor” companies during or after their current employment. These contracts typically restrict workers through time, industry, and/or geography. A time restriction prevents someone from working for a competitor for a defined period of time after leaving a position; a geographic restriction may restrict someone from accepting work in entire regions of the United States; and an industry restriction can prevent a worker from working for a particular type of company. Sometimes, non-competes prevent workers from starting their own competitor companies.”

That is a workable definition for us.

Why is This Ban Important?

Non-compete agreements lock you in, prevent you from opportunity, and stifle competition

The ban is important for several reasons.

First, “An estimated 30 million people  — or one in five U.S. workers — are bound by noncompete restrictions, according to the FTC. That’s a lot of people. According to CBS, “the commission’s final rule does not nullify existing noncompetes with senior executives, who are defined as those earning more than $151,164 a year and who hold a policy-making position. Those execs are much more likely to negotiate the terms of their compensation, according to regulators.”

For most others, though, their non-compete agreements would be nullified. That. Is. Huge.

Second, while advocates say they protect “trade secrets,” what they really do is hold workers hostage. Essentially, they prohibit individuals from working in a specific industry – often for a few years after they leave.

The FTC looked over numerous cases where this happened. One was a security guard who was making $11.00 an hour and had to quit due to childcare issues (he was a single dad). When he tried to take another job for $15.00 an hour at a bank, the non-compete agreement his former employer had required was sent to the bank, and he was let go.

Moreover, the National Employment Law Project notes that “Non-compete agreements are harmful to workers. Originally meant to protect a business’s trade secrets and other confidential information, non-competes are increasingly being used by companies in low-wage industries to block workers from changing jobs—effectively limiting workers’ economic opportunity and suppressing their incomes. Workers in underpaid industries often make more money by moving to another job, so non-competes prevent these workers from improving their wages and working conditions.”

Third, Lina Khan, current chair of the FTC, said, “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy. Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.”

Moreover, ABC reported Khan as saying, “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned.”

Contrasting Views

Those who are pro-worker see this as a good thing

Not surprising is the difference in opinions.

The U.S. Chamber of Commerce has stated its intent to sue the FTC, attempting to block the rule’s implementation.

Its CEO, Suzanne Clark, said, “The Federal Trade Commission’s decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive.”

Who is Right?

The AFL-CIO’s position is absolutely correct. When workers are prohibited from taking a job in the same industry due to a non-compete, workers are effectively trapped and unable to find a better job (whatever is covered by the non-compete), competition is stifled, and wages are driven down, too.

I’ve said it before: one of the dirty little secrets of capitalism (at least as it’s often portrayed in America) is that businesses often like to talk about competition – until it comes to competing for workers. That kind of competition is something businesses DO NOT want.

The reason is that they would then have to be more attractive, compete not just with other companies but also other industries, and do the hard work of creating the type of environment people would want to work for.

Ad so rather than admit this, companies and entire industries – in this case represented by the U.S. Chamber of Commerce – would rather spend enormous amounts of money than deal with employees fairly.

Between this ruling – and the NLRB looking to curtail unfair labor practices from employers, the landscape looks a little better.

Oh, and the most damning thing of all?

The very same people who advocate for “Right-To-Work” are very anti “Right-To-Work” in this.

Put another way, advocates for “Right-To-Work” believe the government should interfere with a business contract (in this case, between an employer and a union), but the government should NOT interfere with a business contract  (non-compete agreements).

Hypocrisy much?