Thirty million people. That’s how many workers federal regulators say could find new jobs, increase their wages, or even start their own companies if freed from the constraints of noncompete agreements.
The Federal Trade Commission in January published a proposal seeking to ban the use of noncompete agreements, a document or clause in a contract legally prohibiting a current or former worker from competing with an employer for a specific time after leaving the job.
In addition, the proposed rule would invalidate agreements that have already been signed. The consumer protection agency says such a move, still in the public comment period, would increase wages by $300 billion, doubling the number of companies and slashing $148 billion in consumer health costs per year.
In promoting its plan, the FTC has also given companies and business associations the best legal argument to challenge the rule in court.
Referred to by employment lawyers and court officials as the “major questions doctrine,” the legal framework suggests that federal regulatory agencies don’t have the power to make major economic or political changes. While not new, the principle gained prominence in a 2022 U.S. Supreme Court case related to the U.S. Environmental Protection Agency’s ability to regulate carbon dioxide emissions.
Joshua Hawks-Ladds, co-chairman of the labor, employment law and employee benefits department at Pullman Comley LLC in South Kingstown, thinks that the same legal interpretation could be applied to the FTC and noncompete agreements.
The FTC’s proposal to ban noncompete agreements still has a long way to go – public comment, economic analysis and congressional review – before it becomes final. It may never happen, according to Hawks-Ladds.
“I never like to predict what will happen, but I am suspicious this rule will ever see the light of day,” Hawks-Ladds said. “My opinion is that the FTC will modify the rule so it’s not so sweeping in scope.”
Nationwide, the FTC estimates 1 in 5 workers are subject to noncompete agreements now.
The ratio may be smaller in Rhode Island, where a law passed in 2019 banning noncompete agreements for low-wage, hourly and student workers. Still, the Ocean State is less strict than other jurisdictions, such as California, which outlaws all noncompete pacts, or Hawaii, which bans them in the technology sector. Neighboring Massachusetts requires any employer who uses them to offer payment in return, known as “garden leave.”
The payment setup makes the FTC’s proposal problematic, according to Matthew H. Parker, a partner at Whelan Corrente Flanders LLP in Providence.
As proposed, the rule would invalidate the noncompete portion of a contract but not the garden leave payment that goes with it. Meaning a worker who got $10,000 to sign a one-year noncompete can go work for a competitor while still getting paid by their former boss-turned-rival.
Like Hawks-Ladds, Parker sees the FTC’s attempt to undo a century-old practice as a potential overreach of power. And while the federal agency claims that it will help employers by letting them move workers from job to job, Parker isn’t sure the benefits outweigh the risks for businesses.
Those risks include the exposure of trade secrets or losing cultivated customer lists when a worker leaves.
And while Rhode Island may not seem like a hub for secret-hoarding corporations, these covenants are popular across all types of industries, from the neighborhood hairdresser to the community veterinarian clinic.
“Everyone has a book of business clients and a competitor,” said Eric Renner, a business litigator and partner at Duffy & Sweeney Ltd. in Providence.
Even so, businesses might hesitate to crack down if a worker violates their noncompete agreement.
Vicki J. Bejma, an associate attorney with Robinson & Clapham who represents employees in legal disputes, said noncompete pacts are generally disfavored by the courts.
In the last decade, the shift of public opinion against monopolies and in favor of workers’ rights has further deterred the use of noncompete agreements, Renner said.
Instead, companies may consider confidentiality or nondisclosure agreements specific to trade secrets or other private information. The FTC rule does not apply to these alternatives unless they are written so broadly that they stop workers from finding other jobs in the same field.
Michael J. Yelnosky, a professor at Roger Williams University School of Law, thinks forcing companies to be more specific in what they’re protecting is a good thing.
“The main problem with noncompetes now is that they are written so broadly,” Yelnosky said. “I think the FTC is really trying to make the point that firms and their lawyers need to focus more specifically on the stuff that is protectable, like trade secrets and customer lists.”
Is there another option instead of restrictive clauses that might start new employees off on the wrong foot?
“I always tell clients to treat workers so they don’t want to leave,” Hawks-Ladds said. “Compensate them fairly, make them happy and want to remain loyal to your company.”
