On Tuesday, April 23, the Federal Trade Commission (FTC) voted 3–2 to issue a final rule formally banning noncompetition agreements nationwide. Noncompetition agreements (NCAs), or noncompetes as they are commonly known, are post-employment contractual clauses that block employees from working for a competitor or starting a competing business for a certain period of time and/or within a specified geographic boundary. Currently, around one-fifth of the U.S. workforce is estimated to be operating under a noncompete.
An economy where only workers bear the risks of a free market is not really free at all, and so this ruling represents not only a significant victory for workers, but also the only logical approach for a liberal market economy like that in the United States. A robust body of peer-reviewed research has demonstrated that noncompetes measurably harm not only the workers bound by them, but also workers not covered by NCAs as well, by reducing mobility and thinning labor markets. NCAs have also been proven to undermine the economy by suppressing the type of competition that drives growth, technological advancement, and prosperity. Not only that, but NCAs are almost universally reviled—out of the over 26,000 comments received by the FTC, 96 percent supported the ban.
The 570-page ruling was well-written and comprehensive in scope. It not only responded to hundreds of individual public comments submitted during the rulemaking process, but also appears to have been deliberately structured to address forthcoming legal challenges. One of the biggest anticipated lawsuits is from the U.S. Chamber of Commerce, which released a statement confirming its plans to sue within hours of the ruling being announced. (It should be noted that one of the Chamber’s central arguments for entering litigation is that forcing firms to compete for workers is uncompetitive.)
A particularly interesting aspect of the ruling was the FTC’s position on its own jurisdictional boundaries. Jurisdiction became a flashpoint of contention during the comment period as the Federal Trade Commission Act—the legislation that gives the FTC its authority—exempts “any entity that is not organized to carry on business for its own profit or that of its members.” This definition introduced a loophole for nonprofit organizations that NCA-supporters were determined to protect. The issue garnered significant attention as noncompetes are both pervasive and problematic within the medical workforce, and nearly 60 percent of hospitals in the United States are structured as nonprofit organizations.
In its ruling the commissioners affirmed that the ban would not apply to any organization outside their jurisdiction, but rejected the notion that claiming tax-exempt status with the Internal Revenue Service (IRS) is the same as falling categorically outside the FTC’s authority. The rule clarified that while the IRS’s designation of tax-exempt status would be considered, the FTC will use a two-prong test to determine whether a given entity is subject to the rule: “the source of the [entity’s] income, i.e., whether the corporation is organized for and actually engaged in business for only charitable purposes, and the destination of the income, i.e., whether either the corporation or its members derive a profit.”
In other words, the FTC appears to be positioning itself to make its own decisions on which entities fall under its jurisdiction, and annex business operations previously thought to be outside the scope of the Commission’s authority by virtue of their tax status. This approach—while likely to infuriate Wall Street given its opposition to government oversight—is squarely in line with both Congressional intention in passing the Federal Trade Commission Act and legal precedent, which allows (perhaps even requires) the FTC to regulate any entity it deems as operating in the interest of owners or shareholders. The ruling states: “As the Eighth Circuit has explained, ‘Congress took pains in drafting § 4 [15 U.S.C. 44] to authorize the Commission to regulate so-called nonprofit corporations, associations and all other entities if they are in fact profit-making enterprises.’”
The FTC has calculated the ban will lead to a slew of benefits, including lower health care costs, the growth of business formation, and increased earnings. Unfortunately, the Commission will only accomplish these lofty goals if it can prevent firms from limiting a worker’s post-employment job options. This is a significantly higher bar than simply outlawing noncompetes, as NCAs are only one arrow in the well-stocked legal quiver available to employers who seek to retain their workforce via restrictive contracting mechanisms.
The next restrictive covenant that should be on the FTC’s chopping block is training repayment agreement provisions—appropriately known as TRAPs. These predatory clauses effectively function as NCAs by requiring workers to repay exorbitant fees to their employers for“on-the-job training” if they choose to exit employment before a specified amount of time. As the FTC’s ban on NCAs goes into effect, employers will likely increase their use of TRAPs and other restrictive clauses.
In sum, this commendable ruling reflects the FTC’s charter to prevent unfair and deceptive acts and protect competition. It also acknowledges and addresses the clear power imbalance between workers and employers. Open competition and voluntary exchange are the heart of the U.S. economy, and firms have been subverting and undermining these principals for years through a variety of business and legal maneuvers that have yielded massive advantages to firms at high cost to workers. With any luck, this ruling is just the beginning of a concerted effort on the part of the FTC to restore balance in the labor market.
Tags: noncompete, federal trade commission, workers rights
Workers Win in FTC Ban on Noncompete Agreements
On Tuesday, April 23, the Federal Trade Commission (FTC) voted 3–2 to issue a final rule formally banning noncompetition agreements nationwide. Noncompetition agreements (NCAs), or noncompetes as they are commonly known, are post-employment contractual clauses that block employees from working for a competitor or starting a competing business for a certain period of time and/or within a specified geographic boundary. Currently, around one-fifth of the U.S. workforce is estimated to be operating under a noncompete.
An economy where only workers bear the risks of a free market is not really free at all, and so this ruling represents not only a significant victory for workers, but also the only logical approach for a liberal market economy like that in the United States. A robust body of peer-reviewed research has demonstrated that noncompetes measurably harm not only the workers bound by them, but also workers not covered by NCAs as well, by reducing mobility and thinning labor markets. NCAs have also been proven to undermine the economy by suppressing the type of competition that drives growth, technological advancement, and prosperity. Not only that, but NCAs are almost universally reviled—out of the over 26,000 comments received by the FTC, 96 percent supported the ban.
The 570-page ruling was well-written and comprehensive in scope. It not only responded to hundreds of individual public comments submitted during the rulemaking process, but also appears to have been deliberately structured to address forthcoming legal challenges. One of the biggest anticipated lawsuits is from the U.S. Chamber of Commerce, which released a statement confirming its plans to sue within hours of the ruling being announced. (It should be noted that one of the Chamber’s central arguments for entering litigation is that forcing firms to compete for workers is uncompetitive.)
A particularly interesting aspect of the ruling was the FTC’s position on its own jurisdictional boundaries. Jurisdiction became a flashpoint of contention during the comment period as the Federal Trade Commission Act—the legislation that gives the FTC its authority—exempts “any entity that is not organized to carry on business for its own profit or that of its members.” This definition introduced a loophole for nonprofit organizations that NCA-supporters were determined to protect. The issue garnered significant attention as noncompetes are both pervasive and problematic within the medical workforce, and nearly 60 percent of hospitals in the United States are structured as nonprofit organizations.
In its ruling the commissioners affirmed that the ban would not apply to any organization outside their jurisdiction, but rejected the notion that claiming tax-exempt status with the Internal Revenue Service (IRS) is the same as falling categorically outside the FTC’s authority. The rule clarified that while the IRS’s designation of tax-exempt status would be considered, the FTC will use a two-prong test to determine whether a given entity is subject to the rule: “the source of the [entity’s] income, i.e., whether the corporation is organized for and actually engaged in business for only charitable purposes, and the destination of the income, i.e., whether either the corporation or its members derive a profit.”
In other words, the FTC appears to be positioning itself to make its own decisions on which entities fall under its jurisdiction, and annex business operations previously thought to be outside the scope of the Commission’s authority by virtue of their tax status. This approach—while likely to infuriate Wall Street given its opposition to government oversight—is squarely in line with both Congressional intention in passing the Federal Trade Commission Act and legal precedent, which allows (perhaps even requires) the FTC to regulate any entity it deems as operating in the interest of owners or shareholders. The ruling states: “As the Eighth Circuit has explained, ‘Congress took pains in drafting § 4 [15 U.S.C. 44] to authorize the Commission to regulate so-called nonprofit corporations, associations and all other entities if they are in fact profit-making enterprises.’”
The FTC has calculated the ban will lead to a slew of benefits, including lower health care costs, the growth of business formation, and increased earnings. Unfortunately, the Commission will only accomplish these lofty goals if it can prevent firms from limiting a worker’s post-employment job options. This is a significantly higher bar than simply outlawing noncompetes, as NCAs are only one arrow in the well-stocked legal quiver available to employers who seek to retain their workforce via restrictive contracting mechanisms.
The next restrictive covenant that should be on the FTC’s chopping block is training repayment agreement provisions—appropriately known as TRAPs. These predatory clauses effectively function as NCAs by requiring workers to repay exorbitant fees to their employers for“on-the-job training” if they choose to exit employment before a specified amount of time. As the FTC’s ban on NCAs goes into effect, employers will likely increase their use of TRAPs and other restrictive clauses.
In sum, this commendable ruling reflects the FTC’s charter to prevent unfair and deceptive acts and protect competition. It also acknowledges and addresses the clear power imbalance between workers and employers. Open competition and voluntary exchange are the heart of the U.S. economy, and firms have been subverting and undermining these principals for years through a variety of business and legal maneuvers that have yielded massive advantages to firms at high cost to workers. With any luck, this ruling is just the beginning of a concerted effort on the part of the FTC to restore balance in the labor market.
Tags: noncompete, federal trade commission, workers rights