Last month, in a long-shot vote, the Federal Trade Commission approved a rule banning non-compete agreements. The Commission found that the non-compete clause constituted an unfair method of competition because it restricted the free movement of workers.
Since the initial draft of the regulations was published, business groups have criticized the idea. Non-compete agreements serve “significant pro-competitive business and individual interests.” The U.S. Chamber of Commerce argued in comments to the FTC. The chamber and others argue that non-compete agreements act as a moat – protecting and encouraging companies to invest in research or employee training.
IN press release American Chamber President and CEO Suzanne Clark argued: “This decision sets a dangerous precedent for government micromanagement of business and could harm employers, workers and our economy.”
However, the FTC rejected this criticism. The Commission noted that companies have other mechanisms, such as non-disclosure agreements and trade secret laws, to protect their intellectual property.
FTC estimates put the number of workers currently employed under non-compete agreements at about one in five Americans, or about 30 million workers.
“Non-compete clauses keep wages low, stifle new ideas and rob the U.S. economy of momentum, including the more than 8,500 new startups that would be launched a year after a non-compete clause,” said FTC Chair Lina Khan in the announcement after the vote.
The commission also estimates that the average worker’s wages will escalate by about $500 per year and that more than 17,000 patents will be filed each year over the next ten years.
Sculptures and headwinds
Although the rule prohibits modern economy-wide noncompete agreements, in response to the FTC’s objections, it provided a carve-out for senior executives. This rule defines this class as political decision-makers who bring home more than approximately 150,000 people per year. Existing non-competes for senior management may remain in effect, but this rule prohibits any future agreements.
Additionally, in response to the objection, the FTC simply prohibits companies from enforcing non-compete agreements. The original rule required them to formally rescind their contracts, which could be cumbersome and costly. Under the final regulations, companies will also have to notify employees that they are no longer bound by contracts.
It is worth noting that the FTC’s vote was not unanimous. Two members of the Republican Party wrote separate statements arguing that the rule was too far-reaching and based on an understanding of agency power that “fell out of favor several decades ago.Both commissioners confirm reservations about non-compete agreements, but say that any radical changes are within the competence of Congress. They add that Congress is unable to muster the political will to introduce changes this is a feature, not a bug.
The final regulation will only come into force at the beginning of September – unless the court steps in and stops its implementation. On the same day, the FTC voted to approve the rule, a Texas tax services company submitted the first challenge in federal court. Like various commissioners, the company argued that the FTC had exceeded its authority.
“If ever a federal agency tried to pull an elephant out of a mouse hole, this is it,” the company argued in its initial complaint.
The FTC wants to ban non-compete agreements, while U.S. Representative Jim Jordan wants to block these efforts
Commission spokesman Douglas Farrar denied these words.
“Our legal authority is crystal clear,” he insisted. “In the FTC Act, Congress specifically ‘authorized and directed’ the FTC to prevent ‘unfair methods of competition’ and ‘to establish rules and regulations to carry out the provisions of’ the FTC Act.”
“This authority has been repeatedly upheld by the courts and confirmed by Congress,” he added. “Addressing the lack of competition that limits Americans’ economic freedom is at the heart of our mandate, and we look forward to winning in court.”
At least two other challenges were submitted from the first one.
“That’s all I survived.”
Last March, the Ohio Capital Journal reported on the FTC’s proposed regulations, highlighting the experiences of a handful of people who work or have worked in Ohio. Last week, the Capital Journal reached out to them to learn their reactions to the FTC rulemaking.
Sarah Eischen and Cindy Holbrook move on with their lives, but the experience has left them confused and scared.
Holbrook described how a former co-worker texted her about the FTC vote: “She said you did it, Cindy.”
“And I answered her, I didn’t do anything. That’s all I survived.
Holbrook is a cosmetologist who moved to Toledo to work at an upscale salon. She already had over twenty years of experience in the industry. Eischen was an account manager for a plumbing manufacturer in Cleveland. Like Holbrook, she joins us with significant industry experience – in her case 15 years.
Sarah Eischen
Eischen signed a non-compete agreement as part of a huge package of documents. Her former employer terminated her contract without explanation after less than a year, but warned that it would continue to enforce the non-competition agreement – an explicit, global ban on her working for more than 20 companies for a year and a requirement that she obtain permission before working at any another company dealing with water and sewage installations.
On her way out, she tried to negotiate changes that would limit the list to the company’s direct competitors. They wouldn’t budge. Ultimately, Eischen left the severance package on the table.
After nine months of non-compete, she got a job with Zurn Elkay.
“And they found it kind of funny,” she said, “because they didn’t think my previous employer was their competitor.”
After several conversations with Eischen’s attorney and the Zurns legal team, they decided to proceed quietly. They did not publicize Eischen’s modern gig and kept her away from accounts that would have overlapped with her previous role until the non-compete ended.
“My lawyer thought they would probably just drop the case rather than pursue me for it,” she explained. “And that seems to be what happened.”
“You know, it was like seeing something behind a bluff in a game of poker,” she added.
Still, the experience was painful. She hesitates to bring up PTSD, but it’s the closest comparison she can think of.
“I was a very confident professional before all this, but now I have been completely shaken,” she said. “So much so that I probably ask myself questions at least once a week.”
“And I know I’m doing the job I’m supposed to be doing, and like I said, my boss is great and everything, but I really enjoyed it, it affected me personally and mentally as a professional.”
Cindy Holbrook
Holbrook’s non-compete clause prevented her from working at any other salon within a 15-mile radius. She found a job in a salon in another city; it was 18 miles as the crow flies, but 14 miles of driving. Her former employer sent a cease and desist letter.
Holbrook had to quit her job and started working shifts every other weekend at her aged salon in Michigan. To make ends meet, she took part in a number of other gigs – First Watch, Crunch fitness and a local health club. She eventually found her way to her current salon, and like Eischen, she started off quietly before the non-compete ban ended.
“I was cutting it down to just two days,” she said. “Whenever someone came in or someone called looking for someone, I could take it, but I couldn’t advertise or grow my clientele.”
She still works at the restaurant on weekends and has started going to therapy.
“All year round, people were saying, ‘Oh, September isn’t far. Oh, September isn’t that far away,” she described.
When the non-compete agreement ended, former clients and the current salon owner congratulated her, but Holbrook just felt empty.
“I remember saying to my boyfriend, ‘I don’t know why I can’t get excited about this,'” she said. “I should be excited about it, but I’m not excited about it. I feel like I’m constantly looking over my shoulder.”
She explains that when she left Soto, she built a diminutive customer base, but knew she couldn’t acquire them when she moved to the next salon. She then built a modern client list at a salon 14 miles away before receiving a cease-and-desist letter. Now he’s on his third round of trying to grow his company.
In some respects, Holbrook says it’s okay — she loves her current salon and her co-workers. But after a year in “survival mode,” she’s still picking up the pieces, and when it comes to turning the page, she feels stuck.
“I know what I have to do,” Holbrook said, “but I got around to doing it, and….”
“I kept the book with my clients on the nightstand at all times,” she continued. “It’s there. He reminds me every day: Take it and just call the number, send a text, send something — and I don’t do that.”
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