The Mostly Persuasive Logic Behind the New Ban on Noncompetes
The Federal Trade Commission used two very different rationales to get to its near-total ban this week on noncompete agreements. One of them is a no-brainer. The other is provocative but not completely obvious. I guess I’d call it a brainer.
As you may have read, the F.T.C. commissioners on Tuesday voted 3 to 2 on a final rule against noncompete clauses in employment contracts, which limit the ability of an employee to quit and immediately go work for a rival. The commission determined that they are an “unfair method of competition.” The rule takes effect 120 days after its publication in the Federal Register, unless a court blocks it before then.
The easy prong of the ban for the F.T.C. to justify is the one that applies to nurses, hairdressers, truck drivers — actually, every kind of worker except for senior executives. For 99 percent of the American work force, the F.T.C. said, requiring workers to sign noncompete agreements as a condition of employment is “coercive and exploitative conduct.”The agency’s 570-page ruling cites articles in The Times and The Wall Street Journal in which workers came forward to say, in the F.T.C.’s words, that noncompete agreements “derailed their careers, destroyed their finances, and upended their lives.” I agree. I wrote a piece in 2021 titled, “Why Are Fast Food Workers Signing Noncompete Agreements?”
But the “coercive and exploitative” rationale doesn’t work for senior executives, who aren’t so easy to coerce or exploit. They’re more likely to have lawyers look over contract offers. They typically have some power in the employment negotiation and know how to use it. Many won’t sign a noncompete agreement unless they get something in return, such as a sweetened pay package.
The F.T.C. defined senior executives as people earning more than $151,164 per year who are in a “policy-making position,” and estimated that fewer than 1 percent of workers meet the description. Under the rule, existing noncompetes for senior executives can remain in force but most new ones are banned. The rule doesn’t apply to clauses that are related to the sale of a business.
For noncompetes involving senior executives, the F.T.C. fell back on another argument, which is that the agreements are “restrictive and exclusionary conduct” that harms competition in product, service and labor markets. (The F.T.C. says that this second argument also applies to other workers, but for them I think it’s overshadowed by the “coercive and exploitative” argument.)