FTC may crack down on non-compete agreements, saying they are bad for workers

'We need not wait for legislation to tackle this issue head-on,' FTC Commissioner Rebecca Kelly Slaughter said

The Federal Trade Commission (FTC) is showing increasing interest in restricting employer-employee non-compete agreements because they limit labor mobility and stifle competition.

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The FTC on Jan. 9 hosted a workshop to discuss the effects non-competes have on American workers, and three of five FTC commissioners have spoken out against non-competes.

"This is an issue the agency is looking at," an FTC spokesperson told FOX Business, adding that the opinions of commissioners are "nuanced."

FTC Commissioner Rebecca Kelly Slaughter said "workers suffer" when the competition is "chilled" by non-compete agreements, or "non-compete provisions," as she calls them, in her remarks at the workshop.

Employees install engines onto truck chassis at the Mack Truck Inc. cab and vehicle assembly plant in Macungie, Pennsylvania, on Thursday, Dec. 10, 2015. (Luke Sharrett/Bloomberg via Getty Images)

"Workers suffer when competition for their labor is chilled and employers are insulated from competition," she said. "Job opportunities become more limited, and workers are less able to negotiate better pay, benefits, or working conditions."

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About 30 million Americans, or one in every five, are covered by a non-compete agreement, according to the U.S. Treasury. Of those 30 million, 12 percent of workers making $20,000 or less per year are covered by non-competes; 14 percent making between $20,000 and $40,000 per year are covered by non-competes; and 50 percent making $150,000 per year are covered by non-competes, the Economic Innovation Institute found in a 2019 study.

"While it would be impossible to know how many workers have been prevented in practice from leaving or seeking to leave a job due to a non-compete, we know that all it takes to chill workers from seeking a better opportunity is a manager waiving a non-compete provision or threatening to sue them if they get a new job," Slaughter said.

"We need not wait for legislation to tackle this issue head-on," she added.

A recruiter, at left, takes the resume of an applicant during a job fair in Philadelphia. (AP Photo/Matt Rourke, File)

Commissioner Noah Joshua Phillips said in his Jan. 9 remarks while he agrees that non-competes should have certain limitations, the FTC does not have enough evidence to prove that they stifle market competition and harm U.S. workers.

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"The more mobile workers are, the more firms effectively compete for their labor," said Phillips. "Policies that favor labor mobility increase that competition; practices that inhibit it — including non-competes — reduce it, and prevent work from getting to where it needs to go."

"Evidence on the effects of non-competes seems to tell both sides of the story, indicating harm to workers,12 but also benefits in some contexts," he continued. " ... Neither the FTC nor any court has found non-competes to violate the FTC Act’s prohibition against 'unfair methods of competition,' and the lack of a good historical precedent."

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Other arguments in favor of non-compete agreements include retaining employees in a merger situation to keep buyers interested in a company, keeping valuable information from competition, maintaining client-employee trust and relationships, putting time and money invested in training to good use and, obviously, stopping competitors from signing valuable employees, especially after they have been trained.

An employee rings up a customer while others prepare orders at a Chipotle Mexican Grill restaurant in Hollywood, Calif., July 16, 2013. (Patrick T. Fallon/Bloomberg via Getty Images, File)

California, North Dakota and Oklahoma have outright bans against non-competes, according to business litigation and employment law firm Beck Reed Riden LLC. A number of other states have imposed certain limitations on noncompetes.

Attorneys general in 18 states sent a November letter to Commissioner Joe Simons in November urging him to restrict non-competes.

"Non-compete clauses in employment contracts prevent employees of one business from leaving and working for or starting another," the attorneys general wrote. "Using non-competes, employers have bound a wide range of workers ... and deprived them of their freedom to use their labor as they choose. Noncompetes deprive workers of the right to pursue their ambitions and can lock them into hostile or unsafe working environments."