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U.S. Moves to Bar Noncompete Agreements in Labor Contracts

cigaretteman

HR King
May 29, 2001
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In a far-reaching move that could raise wages and increase competition among businesses, the Federal Trade Commission on Thursday unveiled a rule that would block companies from limiting their employees’ ability to work for a rival.
The proposed rule would ban provisions of labor contracts known as noncompete agreements, which prevent workers from leaving for a competitor or starting a competing business for months or years after their employment, often within a certain geographic area. The agreements have applied to workers as varied as sandwich makers, hair stylists, doctors and software engineers.
Studies show that noncompetes, which appear to directly affect roughly 20 percent to 45 percent of private-sector U.S. workers, hold down pay because job switching is one of the more reliable ways of securing a raise. Many economists believe they help explain why pay for middle-income workers has stagnated in recent decades.
Other studies show that noncompetes protect established companies from start-ups, reducing competition within industries. The arrangements may also harm productivity by making it hard for companies to hire workers who best fit their needs.
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The F.T.C. proposal is the latest in a series of aggressive and sometimes unorthodox moves to rein in the power of large companies under the agency’s chair, Lina Khan.
“Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand,” Ms. Khan said in a statement announcing the proposal. “By ending this practice, the F.T.C.’s proposed rule would promote greater dynamism, innovation and healthy competition.”
The public will be allowed to submit comments on the proposal for 60 days, at which point the agency will move to make it final. An F.T.C. document said the rule would take effect 180 days after the final version is published, but experts said that it could face legal challenges.

The agency estimated that the rule could increase wages by nearly $300 billion a year across the economy. Evan Starr, an economist at the University of Maryland who has studied noncompetes, said that was a plausible wage increase following their elimination.
Dr. Starr said noncompetes appeared to lower wages both for workers directly covered by them and for other workers, partly by making the hiring process more costly for employers, who must spend time figuring out whom they can hire and whom they can’t.
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He pointed to research showing that wages tended to be higher in states that restrict noncompetes. One study found that wages for newly hired tech workers in Hawaii increased by about 4 percent after the state banned noncompetes for those workers. In Oregon, where new noncompetes became unenforceable for low-wage workers in 2008, the change appeared to raise the wages of hourly workers by 2 to 3 percent.
While noncompetes appear to be more common among more highly paid and more educated workers, many companies have used them for low-wage hourly workers and even interns.
About half of states significantly constrain the use of noncompetes, and a small number have deemed them largely unenforceable, including California.
But even in such states, companies often include noncompetes in employment contracts, and many workers in these states report turning down job offers partly as a result of the provisions, suggesting that these state regulations may have limited effects. Many workers in those states are not necessarily aware that the provisions are unenforceable, experts say.
“Research shows that employers’ use of noncompetes to restrict workers’ mobility significantly suppresses workers’ wages — even for those not subject to noncompetes, or subject to noncompetes that are unenforceable under state law,” Elizabeth Wilkins, the director of the F.T.C.’s office of policy planning, said in a statement.
The commission’s proposal appears to address this issue by requiring employers to withdraw existing noncompetes and to inform workers that they no longer apply. The proposal would also make it illegal for an employer to enter into a noncompete with a worker or to try to do so, or to suggest that a worker is bound by a noncompete when he or she is not.
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The proposal covers not just employees but independent contractors, interns, volunteers and other workers.

 
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Interesting.
I have always heard of these”non-compete” clauses but wondered how they could be “legal.”
Years ago, my dad sold his business to a fellow who worked for a direct competitor in a small town. The buyer had a “non-compete” in his contract but simply went to a judge and had it waived in court and he bought the business. But that was 40 years ago. It’s curious...but I still don’t understand how a “non-compete” can be legal if it deals with a lgal, legit business/occupation.
 
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Sounds like a good thing. Would it make it harder for companies to protect intellectual property do you think?
 
Sounds like a good thing. Would it make it harder for companies to protect intellectual property do you think?
You can still have enforceable confidentiality agreements. Proof is always the tough one there but it’s one tool to help protect info.
 
Sounds like a good thing. Would it make it harder for companies to protect intellectual property do you think?
It's a risk, but I guess companies will need to pay the developers of said intellectual property what they are actually worth to keep them.
 
I never had a non compete agreement but I actually thought they were limited to starting your own business that competes with your previous employer.

I had no idea they extended to not taking a job with a competitor. Wow That needs to go away.
 
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I applaud this.

My new business developer had a 2 year non compete with our competitor. It was a 2 page document. It was worded in a way that it meant that he couldn’t partake in the same industry at all. Our legal department gave me the okay to hire him with 5 months left because he was a very qualified candidate and I didn’t want to miss out. We decided that he could only work on our own accounts and not do any business development. A month went by and he got a letter from that company saying he violated his non compete. Our legal department went to bat for him and basically we suspended his employment for 3 months until it was over. His hold company said that even if he only worked on our accounts, it could be viewed as taking away business from them.

Horrible situation at that time for him. He is now back and full time and has taken that old company to the woodshed on his old accounts
 
I guess I can see a limited non-compete with listed direct competitors. For a very limited time frame after leaving employment.

It has gotten out of hand though. A co workers son is employed at the local McDonald’s franchise and they wanted to promote him to shift manager. They wanted him to sign a non-compete for every restaurant within 10” miles. He said no
 
I've had a few non-compete agreements. One company tried to enforce it, but I actually never signed it when I filled out all the other HR paperwork. Another company tried to enforce it, but that one had been downloaded from the internet and had already been found unenforceable in that employer's state.

Courts have said they must be narrow in time and geography to be enforceable, and can't keep someone from working somewhere. As with any contract, there has to be consideration or added value.
 
A company I used to work for started forcing new hires to sign one after I had already been working there for several years. They kept trying to get me to sign one, mailing them to me regularly for several months. I just threw them in the trash each time.

Finally one day the HR manager called me to ask why I hadn’t signed one and returned it.

“Is there an incentive for me to sign it?”

“No.”

“Are there consequences for me not signing it?”

“No.”

“Then why would I sign it?”

They never sent me another one after that phone call.
 
Some states have enacted law that the (potential) employer must advise you to consult an attorney and give you appropriate time to do it or the non-compete is null and void. It should be changed to the potential employer footing the bill for an attorney of the employee’s choice and compromise at that
 
Good. They’re usually not worth the paper they’re written on.

Trade secrecy is another matter but doesn’t sound like that’s the deal here.
 
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Good. They’re usually not worth the paper they’re written on.

Trade secrecy is another matter but doesn’t sound like that’s the deal here.

While that may be true in some cases, what are you going to do when you have a motion for an injunction filed by a former employer? That injunction essentially ends your new employment
 
While that may be true in some cases, what are you going to do when you have a motion for an injunction filed by a former employer? That injunction essentially ends your new employment
Or, your original company can sue you. The legal expenses to defend can be ridiculous for an individual. Meanwhile, big companies already have a legal team on payroll. They don’t give a F about the expense, as long as they F you financially.

This happens all the time in my line of work, which is Healthcare staffing. Go to work for a staffing agency and they will most certainly have a 1 year non-complete.

I am 100% in favor of what the FTC is doing here.
 
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There is another side to this guys, for example, I’m a small business owner. I hire on a guy with zero experience, and pay him to be trained on the job to learn the trade. Then he can up and leave for another company after I’ve invested in him. I’m not saying non competes are right or wrong, but there is a reason they exist.
 
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I’ve seen some move to NDA included in separation packages vs a straight non-compete. I’m sure that blurs the lines too but solves the issue of not allowing the individual the ability to work where they want.
 
Or, your original company can sue you. The legal expenses to defend can be ridiculous for an individual. Meanwhile, big companies already have a legal team on payroll. They don’t give a F about the expense, as long as they F you financially.

This happens all the time in my line of work, which is Healthcare staffing. Go to work for a staffing agency and they will most certainly have a 1 year non-complete.

I am 100% in favor of what the FTC is doing here.

The hearing on an injunction happens before that concurrently with the employee arguing about venue. You may eventually win the venue argument and/or the hearing on the injunction, but try explaining that to your new employer.

The real impetus here is remote work making this too legally-cumbersome for companies to handle. I had standing in 3 states that I could argue venue at when I quit at the end of the year
 
There is another side to this guys, for example, I’m a small business owner. I hire on a guy with zero experience, and pay him to be trained on the job to learn the trade. Then he can up and leave for another company after I’ve invested in him. I’m not saying non competes are right or wrong, but there is a reason they exist.

In the end it boils down to workers finding good pay and benefits in a good working environment. Employers that don't provide those will have workers leave.
 
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