Source: CNN
What do a pediatrician, a bartender who’s being sexually harassed, a former intern for an electrical engineering firm and an asphalt company salesperson have in common? They are among the members of the public who submitted comments to the Federal Trade Commission (FTC), urging it to ban noncompete provisions in employment contracts.
These workers are based in widely diverging fields and regions, from Boston and Baltimore to Michigan and Appalachia. But they all found their careers upended because their employers subjected them to noncompete provisions, which prevent workers from getting a job with their current employer’s rivals for a significant period (usually from six months to two years). According to the FTC, an estimated 18% of US workers (around 30 million people) are restricted by noncompetes.
In response to these workers’ stories, as well as to overwhelming economic evidence, the FTC took decisive action earlier this week, voting in favor of a rule to ban nearly all noncompetes scheduled to take effect in August. Unfortunately, business groups, including the US Chamber of Commerce have already filed lawsuits challenging the rule.
The FTC rule will bring powerful benefits to workers and the economy. And given its solid foundation in law and evidence, courts should uphold it: The FTC has statutory authority to regulate unfair methods of competition, and hard data from scholars and countless individual testimonies demonstrate noncompetes’ damage to fair market competition and to people’s lives. But given the number of Trump-appointed judges in the federal judiciary combined with the anti-worker, anti-regulation stance of the Supreme Court, the rule’s long term prospects are far from certain.
Nonetheless, the FTC’s action is a watershed moment, whatever happens in court. It establishes a clear, incontrovertible record about why noncompetes are so harmful: They prevent workers from moving to a new job in their field and geographic area, leaving workers only bad options — stop working altogether, leave their field, move to a new region or stay stuck. Noncompetes also suppress wages and job mobility and except for the very highest earners, virtually no one has the ability to negotiate over noncompetes; they’re almost always a take-it-or-leave-it proposition.
The FTC’s rule also creates a resounding national norm about how workers should be treated: They shouldn’t be trapped in a job they want to leave. And the rule creates an understanding about how innovation can flourish, by allowing would-be entrepreneurs to create new products and businesses instead of being obstructed by an existing boss. In light of ongoing litigation against the FTC rule, Congress and state legislatures should take the baton and pass their own prohibitions on noncompete provisions.
My interest in noncompetes began when I led the New York State Attorney General’s Office’s labor team. Our focus was on the affected workers, but over time, I’ve also come to understand noncompetes’ negative impact on the broader economy.
A torrent of research over the past decade has shed light on just that. Here’s what economists found: Noncompetes thwart innovation and entrepreneurship, preventing the creation of new firms. A worker with a great idea for a new company or product can’t just leave to start their own business. One study found that in states where noncompetes are fully allowed, fewer patents are issued. Another found that employers don’t even value noncompetes that much: Washington state businesses were not willing to raise workers’ pay even by a few thousand dollars to be able to impose noncompetes on them. (And there are far less restrictive ways for businesses to protect their trade secrets.)
The FTC considered these studies, along with other extensive economic research, in deciding upon their rule. The agency also reviewed thousands of public comments they received about the rule: Of over 26,000 comments, over 25,000 supported the Commission’s proposal. The FTC also responded to valid concerns raised in the comment process. For example, the final rule wisely includes “stay-or-pay” contract terms, like Training Repayment Agreement Provisions (TRAPs) that require workers to pay their employer money in order to leave a job; these sneaky “traps” function like noncompetes and would have obviated the new protections for many workers.
The FTC rule provides a model of evidence-based rulemaking in the public interest. Unfortunately, that may not be enough to save it from a 6-3 Supreme Court decision. The current majority has a history of decisions that are fiercely hostile both to workers and to the notion that government agencies should play an active role in regulating corporate conduct.
Regardless of what happens with the Supreme Court, this rule is seismic. The evidence it has amassed provides an unusually strong and extensive basis for legislation. For several years, Democratic Sen. Chris Murphy of Connecticut and Republican Sen. Todd Young of Indiana have co-sponsored bi-partisan legislation to ban virtually all noncompetes, and a growing number of states have also taken action. Meanwhile, policies at the state level do not fall out on partisan lines — California, Minnesota, North Dakota and Oklahoma all have noncompete bans.
The likelihood of extended litigation about the FTC rule and uncertainty about a final outcome underscore the urgency of federal and state legislation on this issue. Given the evidence about innovation and new firm formation, states that don’t curb noncompetes risk not only harming their constituents, but also being left behind.
Finally, enforcement is essential; otherwise, some unscrupulous employers will likely still include banned noncompetes in workers’ contracts. This would allow them to benefit from a chilling effect: Many employees will assume that lawyerly-looking employment contracts are valid and won’t look for new jobs for fear of being sued.
Whether via the FTC rule or through legislation, curbing noncompetes is urgently needed. The drive to pursue new opportunities is deeply embedded in our country’s history and ethic. The pediatrician, bartender, electrical engineering intern and asphalt company salesperson deserve the ability to advance in their careers, and their current employers should have no right to stop them.