Why the US must ban non-compete clauses

December 16, 2022 10:32
Photo: Reuters

 US President Joe Biden tweeted in August, “instead of workers begging employers for work, we’re seeing employers have to compete for American workers.” Many corporations, however, are not competing for workers. Instead, they’re using non-compete clauses to lock their employees in place, with more and more employers suing workers for seeking new opportunities. Tens of millions of workers across the United States are currently subject to contracts that force them to stay at their current jobs despite better opportunities elsewhere, thus limiting their freedom to accept a job or to start a business in their field.

In the past few years, many states – including Colorado, Illinois, Nevada, and Oregon – have restricted employers’ ability to impose these contracts on workers. But the recent weakening of a landmark law on non-compete clauses in the District of Columbia shows the limitations of the state-by-state approach.

The federal government must ban coercive non-compete clauses for all workers. While Democrats recently lost their majority in the House of Representatives, the Biden administration has the authority to institute a full national ban without new legislation. The president recognized as much when he called on the Federal Trade Commission to regulate non-compete clauses in his sweeping 2021 Executive Order on Promoting Competition in the American Economy. In that spirit, the FTC should act on Biden’s recommendation and outlaw non-compete clauses as quickly as possible.

The extended battle over DC’s ban underscores the need for federal action. In late 2020, the DC Council voted unanimously to prohibit non-compete clauses for nearly all workers. Employers and trade associations such as the DC Chamber of Commerce immediately challenged the measure. In July 2021, we were called to testify in support of the law after council member Brooke Pinto introduced amendments to weaken it substantially.

Employers made audacious arguments. For example, a representative for the Maryland-DC-Delaware Broadcasters Association stated that a broadcaster should be able to prevent a salesperson from taking all that they have learned to another station. The Chamber of Commerce argued that employees should be prevented from “unwittingly considering, applying, or disclosing confidential information obtained through work with a competing firm.”

The DC Council ultimately found the employers’ arguments persuasive and voted this past July to weaken the ban. Under the amended law, most workers earning more than $150,000 per year can be subject to a non-compete clause. While these workers are comparatively well-off, many have substantial monthly expenses. The high cost of living in the DC metropolitan area and student loans, for example, often prevent workers from waiting out a non-compete clause through unemployment. More fundamentally, all workers, regardless of income, should be free to leave their jobs and continue to work in their fields, rather than stay at a job they want to leave, take a temporary job in another field (for example, switch from accounting to retail), or remain unemployed for a year or longer.

To the extent that employers have valuable proprietary information to protect, non-compete clauses are, in the words of University of Denver law professor Viva Moffat, “the wrong tool for the job.” Instead, employers can use less restrictive alternatives, such as trade secret laws and targeted non-solicitation agreements.

They could also maintain a loyal and productive workforce by treating their employees well, such as by offering fair wages and benefits. After all, even though average wages have increased significantly over the past year, they have not kept up with inflation. Moreover, contrary to the assertions of certain prominent economists, wages are restraining inflation, not fueling it.

The setback for workers in DC underscores the limits of subnational action. A successful state-based approach, which resulted in a complete ban on non-compete clauses, would require overcoming powerful employers and their lobbyists in 50 jurisdictions. That fight would take many years to win, even under favorable political conditions.

The federal government must step in and build on its long history of regulating labor relations. The US Constitution’s free-labor clause, the Thirteenth Amendment, outlawed slavery and involuntary servitude (except for prisoners). In the 1930s, Congress prohibited contracts that barred workers from joining unions and recognized workers’ right to unionize.

The Biden administration should follow these examples and ban non-compete clauses and similar contracts restraining worker mobility. Because a national prohibition on non-compete clauses does not require an act of Congress, it will not be affected by the likely political gridlock in the aftermath of the midterms. The FTC already has the power to prohibit these contracts under its expansive “unfair methods of competition” authority. As part of a broad labor and public interest coalition, our organizations petitioned the FTC for such a rule in March 2019.

In the summer of 2021, upon signing his executive order on antitrust policy, Biden encouraged the FTC to regulate non-competes. He described workers bound by such clauses as “powerless, disrespected, bullied, trapped,” and noted, “That’s not right. Workers should be free to take a better job if someone offers it.”

Seventeen months later, the FTC has yet to propose such a rule. The agency and its chair, Lina Khan, must heed the president’s call and act quickly. A federal ban on non-compete clauses would be a major accomplishment for Biden, who pledged to be the most pro-labor president in US history. It would also allow millions of workers to escape the yoke of oppressive employers.

Copyright: Project Syndicate
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Najah A. Farley is a senior staff attorney at the National Employment Law Project. Sandeep Vaheesan is Legal Director at the Open Markets Institute.