Will the playing field be leveled between employers and employees when it comes to non-compete agreements? Perhaps if anything comes out of the Federal Trade Commission’s (FTC) hearings held last 9/13 and 9/14, which focused on how the agency’s competition and consumer protection approaches are working. One area of focus is whether enforcement practices need to be expanded or the law requires changes concerning non-compete restrictions.
Specifically, in advance of the FTC hearings, Federal Trade Commissioner Rohit Chopra released his comments raising concerns about the use of non-compete agreements:
Take, for example, restrictive noncompete clauses in employment contracts. These agreements prevent employees from working for rival firms for a period of time after they leave. As recent studies show, these agreements – which now cover roughly 60 million Americans – deter workers from switching employers, weakening workers’ credible threat of exit and diminishing their bargaining power. In short, by reducing the set of employment options available to workers, employers can suppress wages.
Mr. Chopra’s comments urged the FTC to write rules defining when non-compete agreements for employees are permissible. His comments also followed a report released by four House Democrats, including Michigan Congresswoman Debbie Dingell, recommending that noncompete agreements be significantly restricted.
The report, The Future of Work, Wages & Labor, made the following observation:
One reason for this decrease in mobility is the increased utilization of non-compete clauses by employers. Firms do this under the premise that they are protecting intellectual property and other key investments, but this claim loses muster when considering the widespread use of noncompete clauses in the low-wage fast food industry. Employers are looking to keep training costs low by minimizing turnover and reducing the need for training, and as such, making labor markets less competitive and suppressing wages. To increase worker freedom and fairness, Congress should … Ban all non-compete clauses in employment contracts, with exceptions for senior executives who possess trade secrets.
One reason for the FTC and Congressional Democrats’ concern about the use of post-employment7 restrictions is persistent and slow wage growth. In this regard, Bloomberg, by Toluse Olorunnipa and Sho Chandra, report in Americans Are Making Less Money Despite Trump’s Promises, that,
real wages have remained mostly stagnant despite an expanding economy, record stock prices, soaring corporate profits and a giant deficit-fueled stimulus from Trump’s tax cuts… [But] [i]nflation-adjusted hourly wages dropped 0.2 percent in July from a year earlier, their worst reading since 2012 … They’ve grown at an average 0.3 percent annual pace under Trump overall, compared with 1.1 percent during Barack Obama’s second term.
Compelling evidence for this stagnant wage growth comes from research discussing the outsized influence employers have when it comes to setting wages below traditional market conditions. See Econ 101 No Longer Explains the Job Market, by Noah Smith, which cites to two papers (available by registration and/or subscription); the first by José Azar, Ioana Marinescu, and Marshall Steinbaum; and the second by Efraim Benmelech, Nittai Bergman, and Hyunseob Kim. Both articles provide compelling empirical evidence for why employer created monopolies have stagnated workers’ wages.
Closing Thoughts – Revising Non-compete Law is needed, but not to the extreme proposed.
In our experience, limiting the enforcement of non-compete restrictions should happen, but not to the extreme argued for by the Congressional Report. Limiting non-compete restrictions to only “senior executives” with access to trade secrets is not the answer. First, an executive – senior or otherwise – often has access to a range of information that may not rise to the level of a trade secret. This is also true of non-executives, especially in sales or marketing who rely upon an employer’s confidential information to be successful. And that sort of confidential information would provide an unfair advantage if used by a competitor.
Second and building on the preceding point, misappropriating trade secrets is already unlawful even without a non-compete restriction. But a non-compete provides essential protections not available when it comes to non-trade secret information.
However, non-compete enforcement is too often used for improper purposes. For example, we’ve represented individuals in non-compete disputes making less than $25,000.00 annually. These individuals did not have access to information or the means to engage in unfair competition.
Also, we’ve represented numerous clients in non-compete litigation, especially in disputes with staffing or employee leasing companies, where the former employer targeted the individual for litigation to merely stifle legitimate competition.
For more information about non-compete law and litigation, contact attorney Jason Shinn. He has focused on non-compete law relevant to employers and employees since 2001. His experience includes drafting, negotiating such agreements and litigating disputes in Federal and Michigan courts, including numerous preliminary injunctions.