- President Biden has directed the FTC to crack down on non-competition agreements.
- Non-compete clauses can unfairly hinder the mobility of low-level workers due to disparate bargaining power.
- The FTC should level the playing field where needed.
- Jose Sariego is a corporate partner at Miami-based Bilzin Sumberg.
- This is an opinion column. The thoughts expressed are those of the author.
Other than mask mandates, is there anything more unpopular in the law these days than the non-competition agreement? These agreements, which prohibit employees from going to work for a competitor, have always been viewed with distaste, considered restraints of trade, and been narrowly construed. Several states have outlawed them altogether or severely restricted their use. And now President Biden has piled on with an Executive Order “encouraging” the FTC to ban or limit non-competes nationally.
Yet non-competes not only persist but have grown in use in recent years — according to the Executive Order, up to 60 million workers are affected by these agreements. This explains their unpopularity and the current debate. While in the past these agreements were reserved for high-level executives or highly-trained technical employees, today horror stories abound about clerks and fast-food workers being subjected to these restraints, often at the cost of their livelihood.
And in today’s tight labor market, the allure of handcuffing a scarce employee is stronger than ever. So the tension between companies’ desires to keep workers and the marketplace’s love of freedom of movement likely will grow tauter.
So what’s wrong with non-competes in the first place? If the law values liberty of contract so much, why can’t an employee and employer agree to whatever they want?
Difference in bargaining power
The reason that non-competes are harmful to lower-level workers and unreasonably stifle their work mobility and opportunities is largely due to the lack of comparative bargaining power between the parties. Liberty of contract presumes that both parties to the contract are relatively equal in bargaining position. That often is not the case with hourly workers and their employers.
Non-competes at this level resemble “contracts of adhesion” that the law has found repugnant in other similar contexts. Most lower-level employees receive an “offer you can’t refuse” ultimatum that they cannot negotiate. These employees also are less likely to know their rights, which limits their ability to push back and negotiate more reasonable restrictions.
Moreover, few employees have the wherewithal financially or emotionally to battle a giant corporation, so the mere threat of being sued creates an in terrorem effect that is sufficient to bind the employee to the employer. Once bound, of course, the employee is at the mercy of other possible abuses, such as low wages, long hours, and unsafe working conditions.
Non-competes are fine for some
No one is crying any rivers for highly-paid CEOs and their C-suite minions who are obligated to enter into non-competes in exchange for their million-dollar salaries, bonuses, and equity grants that companies shower on them. These are big boys and girls who have the leverage and bargaining power to negotiate lucrative deals for themselves, and if they have to sit on the sidelines for a year or two if they decide to leave their company or are bid adieu, they can certainly afford to do so.
Similarly, scarce, highly-trained technical workers such as software developers and others in the tech industry may also be an appropriate place for non-competes. Companies often spend tens of thousands to bring these workers from overseas and to provide expensive training and experience. For these workers capriciously to jump ship to a competitor seems ungrateful to say the least.
The real issue is at the lower levels of the work ladder, where employees have little bargaining power on the one hand and where the company’s interest in restraining the employee is less compelling. Although companies are having trouble these days filling even low-level positions in service industries, the solution is for companies to pay more to attract these historically underpaid workers rather than saddling them with non-competes that essentially enslave them to their corporate masters.
For workers making less than a certain wage, it is fair and reasonable either to ban such agreements altogether or to severely limit the time and scope of the agreements — say to prohibit an employee for a period of 30-90 days from leaving for a competitor in the same business within a mile of the current location. In this way, a worker will not jump willy-nilly to a fast-food restaurant across the street, but can still find better opportunities farther away where the impact on the current employer is minimal.
Keep in mind that there are other, sensible restrictions that companies can impose on employees that do not impinge on a worker’s freedom of movement unreasonably. Non-competes typically are one leg of a three-legged stool that includes a confidentiality provision and a non-solicitation restriction. The confidentiality provision prevents an employee from walking away with an employer’s “secret sauce” and either setting up shop independently or selling the information to a competitor. No one argues that companies cannot protect their trade secrets and other confidential and proprietary information by means of these restrictions.
Likewise, it is reasonable to restrain an employee, who in the course of employment has made contacts with other employees, vendors, and clients of the employer, from turning around and using the contacts he or she made to solicit those very persons and entities when the employee leaves. Those contacts may very well be confidential and proprietary information as well, but even if they are not, a company has a compelling interest in preventing employees from using those valuable contacts for any purposes other than the company’s.
Even these restraints must be “reasonable,” however. Confidential information cannot cover information in the public domain, for example. And non-solicitation provisions cannot extend to vendors or clients that are commonly known or with whom the employee had little or no contact while in the company’s employ.
In sum, the real problem with all of these “restrictive covenants” is the lack of leverage that low-level workers have to protect themselves against abuses. The FTC should level the playing field, taking into consideration legitimate business interests while safeguarding workers’ ability to move about in an increasingly mobile and changeable marketplace.