Image credit: Public Domain Vectors
The Federal Trade Commission recently announced that it intends to use its rule-making authority to ban non-compete agreements for workers. These contracts, which have become ubiquitous across the economy, prevent employees from working for a competitor to their current employer, usually within a certain geographic range and for a certain amount of time.
While originally intended to protect trade secrets and typically applying to more executive class workers, non-competes now bind about one in five Americans, if not more. And those workers increasingly hold lower-wage positions in which protecting secret formulas or processes is not an issue, such as janitorial staff.
The FTC’s move, once completed, is a big bold, first step toward economic freedom for all workers. But it can’t finish the job alone. State lawmakers need to step up and both backfill the law to protect workers over whom the FTC has no jurisdiction, as well as ensure that court rulings or future federal administrations don’t let the non-compete machine start to run rampant again after a short pause.
Before getting into the guts of this, I think it’s worth reiterating: At least one in five American workers is bound by a non-compete, making it very difficult if not functionally impossible for them to find a new job. There are lots of things binding workers to a place, including family and childcare obligations, so they often can’t get outside the range of a non-compete to take a new position. This gives their employers power to suppress wages and degrade working conditions, as workers can’t use a threat to leave for a new position at a competing firm as leverage to raise pay, increase their benefits, or push for other workplace improvements.
Workers across loads of industries —retail, fast food, health care, media, and on and on— are bound by these agreements, which academic research has shown have a detrimental effect on wages. I mean, it’s right there in the name: Non-compete, i.e., corporations don’t have to compete for workers, which will inevitably drive down the cost of labor.
You can see the effect these agreements have reflected in the fact that, already, the FTC’s request for comments on its proposed rule has prompted thousands of workers to write in with their stories of non-compete-related woe.
Corporations, meanwhile, are preparing for the potential elimination of non-competes by coming up with wildly innovative ideas to retain employees, such as raising their pay or giving them promotions.
Notably, the FTC’s ban applies retroactively, meaning existing non-competes would no longer be enforceable, and also applies to backdoor non-competes, such as training repayment requirements that function as non-competes because they force workers to repay such a large amount of money for training they received that they can’t reasonably leave their job.
Currently, three states — California, North Dakota, and Oklahoma — as well as Washington, D.C., broadly ban or render unenforceable non-compete agreements, in line with the FTC’s proposed rule (though enforcement of that standard even in those places can be spotty). Several others ban some kinds of non-competes, like those for lower-age workers, while leaving others in place. But most states do neither.
There are two reasons state lawmakers across the country should follow the evidence and the policy trail blazed by the FTC by getting on board with a broad ban now and putting it into place with a statute of their own.
First, the FTC doesn’t have jurisdiction over every business in America, most importantly non-profits. That means that non-profit hospitals, where non-competes are rampant, would still be allowed to use them, regardless of what the FTC does. State lawmakers, though, can ban non-competes at non-profit entities, taking care of that issue, and protecting the healthcare workers upon whom local communities depend. (This was an issue that came up in a new paper my shop, the American Economic Liberties Project, just released. More on that below.) There are other entities, like some banks and credit unions, that the FTC also doesn’t cover, but the healthcare field is the one that to me is most concerning.
Second, there’s every chance that conservative courts take a dim view of a rule meant to shift power from bosses to workers; the Supreme Court, in particular, has been making a slew of anti-worker rulings in recent years. Or a future administration could always discard, weaken, or not enforce the new rule.
But state bans on non-competes have been in place for, in some cases, more than a century. The California, North Dakota, and Oklahoma laws all date to the late 1800s. So by passing their own laws, states inoculate themselves against the federal judiciary or future federal policymakers pulling some nonsense. That’s not to say that some future court wouldn’t find a way to attack a state-level law, but it would have to overcome a lot of history in order to do so.
There are, of course, lots of other ways in which corporations corner labor markets and restrain competition for workers, from using no-poach agreements to straight-up wage fixing to blocking salary transparency. But getting rid of non-competes is a big deal and is a big win for economic freedom for all workers. It’d be a shame if that win was a short-lived one, and it definitely doesn’t have to be, if state officials step up.
This post originally appeared in slightly different form on the author’s Substack, Boondoggle.
Pat Garofalo is the author of The Billionaire Boondoggle: How Our Politicians Let Corporations and Bigwigs Steal Our Money and Jobs, the Boondoggle Newsletter, and the director of state and local policy at the American Economic Liberties Project.
