By A.J. Kaufman, Managing Editor
Earlier this year, the U.S. Federal Trade Commission (FTC) issued a nationwide rule banning post-employment noncompete agreements, claiming it is “protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.”
Circumventing the courts and Congress, FTC Chair Lina Khan says noncompete clauses keep wages low, suppress new ideas and can hinder new startups.
The FTC estimates that the final rule banning noncompetes will lead to new business formation growing by 2.7% per year, resulting in more than 8,000 additional new businesses created annually.
Khan, who has been controversial due to high profile lawsuits since assuming the role in 2021, also believes the rule will increase wages for most workers by about $500 per year and lower health care costs by billions over the next decade.
The Wall Street Journal (WSJ) mainly disagreed and argued after the edict that non-compete agreements are rarely iron-clad, and employers are often willing to negotiate less restrictive agreements to protect their trade secrets and training investments. They said companies also usually offer more pay and benefits in exchange for workers agreeing to a noncompete.
According to a U.S. Chamber of Commerce survey cited in the WSJ staff editorial, almost 80% of responding employers said they provide additional compensation that spans the duration of an agreement or longer. They argue that employers will pay and invest less in workers if workers can easily take the skills they acquire on the job elsewhere.
They believe Khan’s rule “will help deep-pocketed businesses while harming smaller ones.”
Some states are considering legislation to limit non-competes for lower-paid workers, which could also make it harder for businesses to retain workers.
“State and local lawmakers can better balance such tradeoffs for their constituents than can bureaucrats in Washington,” the WSJ also advised.
Business groups and many Republicans say that noncompetes are a critical tool for businesses to protect trade secrets, confidential information and their investments in recruiting and training workers.
To wit, U.S. District Judge Ada Brown in Dallas partially blocked the rule on July 3 from taking effect; however, the court did not issue a nationwide ban. In a written decision, she declared that the FTC, which enforces federal antitrust laws, lacked the power to adopt broad rules prohibiting practices that it deems unfair methods of competition.
The court separately found that the non-compete ban was arbitrary and capricious, and therefore invalid. It characterized the rule as “a one-size-fits-all approach with no end date.”
This emanated from a lawsuit by the Ryan LLC, a tax services and software provider based in Texas, and the U.S. Chamber of Commerce, claiming the FTC lacked the authority to adopt the ban because Congress only granted the agency limited powers to enact such rules.
According to FTC data, about 30 million people — or roughly 20% of U.S. workers — have signed noncompetes. The FTC’s non-compete ban is scheduled to take effect Sept. 4. The issue very probably will end up in the U.S. Supreme Court.
Closer to home, Bristol-based SESCO Management Consultants wrote in a letter that it “does foresee continued challenges on the FTC’s noncompete rule between now and Sept. 4” and “will monitor developments and keep clients and subscribers informed.”
The Business Journal’s view is that while the FTC may think this effort is well meaning, it appears to be a solution in search of a problem. More specifically, the rule also serves as an ill-conceived and inappropriate usage of federal government power that can hurt local business more than aid them. This power is surely much better reserved for those closer to the situation here in the Appalachian Highlands than in our nation’s capital.
