Noncompete agreements have typically been an issue for the states, with employees allowed certain protections depending on the terms of their contracts. But the Biden administration is looking to upend that system, saying it’s time for noncompete agreements to cease in order to promote workers’ rights.
Legal experts predict lawsuits if the federal government does alter the employment contract system, and a business ethics expert says corporations could lose out on protecting their interests and assets.
Earlier this year, the Federal Trade Commission introduced a new rule that would prohibit employers from enforcing noncompete agreements on employees, reasoning they are a “widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses,” according to an FTC press release.
Bloomberg Law reported that the FTC is expected to vote on the proposal in 2024. The agency estimated that workers’ wages could increase by $300 billion each year and that noncompete agreements affect roughly 30 million Americans.
“Employers have a right to protect their interests, in particular confidential corporate matters that could negatively affect their ability to compete in the marketplace if a former employee takes that confidential information to a competing company,” said Ann Gregg Skeet, senior director of Leadership Ethics at Santa Clara University’s Markkula Center for Applied Ethics.
“The recent FTC stance on noncompete agreements, however, seems to set aside this method of protecting corporate interests as the FTC believes they reduce competition unfairly and prevent workers from being able to secure higher wages,” Ms. Skeet added.
A noncompete agreement is part of a contract between an employer and a worker in which the employee agrees to not work for a competitor for a certain period of time after the termination of their employment. It’s meant to protect a business’ trade secrets from being taken to and used by competitors.
The most famous ongoing dispute this year of an employment fallout involves Fox News and former host Tucker Carlson, who was ousted in April and has posted videos on Twitter. Fox says the videos violate his contract that runs through 2025. Mr. Carlson’s lawyers argue that Fox violated the contract’s terms first, according to The Associated Press.
A spokesperson for Fox News and a lawyer for Mr. Carlson did not immediately respond to a request for comment.
Scrutiny of these agreements isn’t focused just at the FTC. Just last month, the National Labor Relations Board General Counsel Jennifer Abruzzo issued a memo telling NLRB lawyers that noncompete agreements limit employee rights and might infringe on the National Labor Relations Act, which protects workers’ rights to collective bargaining. It’s this guidance that gives NLRB lawyers authority to charge employers with unfair labor practices.
“Noncompete provisions reasonably tend to chill employees in the exercise … rights when the provisions could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work,” Ms. Abruzzo said.
Catherine Fisk, an employment and labor law professor at the University of California, Berkeley, said the NLRB reasoned that noncompete agreements could infringe on federal law protecting workers’ rights to unionize.
“That’s because they intimidate employees from doing anything that would prompt the employer to fire them for fear that the noncompete would prevent the employee from working in any other job in the same industry for the duration of the agreement (typically a year or two),” Ms. Fisk said in an email.
She said that just because an employee agrees to a noncompete deal doesn’t mean it is an enforceable contract.
“The fact that the employer has paid the employee to sign the non-compete agreement does not change the analysis,” Ms. Fisk said. “There are lots of contracts that are unenforceable, even if the person was paid to agree: you can’t sell yourself into slavery, for any price. You can’t enforce a contract to engage in any other illegal activity (e.g., sales of illegal drugs, prostitution in states that outlaw it, child labor, etc.).”
Ms. Skeet, the business ethicist, said that while employers’ have rights to protect their interests, workers also have autonomy, calling it a fundamental right.
“People have a right to not be treated as a means to an end. To the degree that a noncompete is used to thwart the activities of competing companies from hiring qualified workers, employees affected by them are being used as a means to that end,” she said.
California, North Dakota, Oklahoma and Washington, D.C., ban the use of noncompete agreements.
According to a 2022 report by the Society for Human Resource Management, the use of the agreements is becoming less common. Nine states — Colorado, Maryland, Maine, Illinois, New Hampshire, Washington, Virginia, Oregon, and Rhode Island — allow non-compete agreements only if an employee earns a certain amount of money.
Michael Green, an employment and labor law professor at Texas A&M University, said noncompete agreements generally have been covered by state law and can vary in restrictions and enforcement between jurisdictions.
Certain limitations on noncompete agreements have emerged in part because of the #MeToo movement, he added.
“With the growth of the #Metoo movement, policymakers have become more interested in limiting employer agreements that insist employees do not have certain rights that can deter open resolution of sexual harassment and assault claims. As a result, efforts to limit arbitration, non-disclosure and even covenants not to compete have become subject to more scrutiny and some states with California being a key leader have sought to ban such agreements,” Mr. Green said.
He said to expect court challenges if the FTC or the NLRB bans noncompete agreements, given that states have ruled on contract law in this area.
“On the state issue, it has been a long-standing approach that each state can determine whether covenants not to compete are enforceable and I assume that will not change,” he said. “Whether the federal agency [the FTC or the NLRB] attempts to outlaw these agreements will likely have to be resolved ultimately through court challenges.”
A spokesperson from the FTC did not immediately respond to a request for comment.
• Alex Swoyer can be reached at aswoyer@washingtontimes.com.
Please read our comment policy before commenting.