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The use of noncompete agreements is increasingly common in lower-paid industries, where they can severely limit workers’ earnings.
Last week, the FTC proposed a ban on noncompete agreements, which are employment contracts that prevent workers from seeking or acquiring a new job in the same field. This bold expansion of unfair competition law is projected to raise workers’ wages by over $300 billion annually. This would not only empower the 18 percent of workers currently subject to noncompete agreements, but based on past precedent, it would also raise the wages of workers who aren’t bound by noncompetes.
Even before the ban has been finalized, the Chamber of Commerce announced its opposition, and FTC Commissioner Christine Wilson staunchly dissented from the proposal. In light of Republican discontent, we should expect that the next time they control the FTC, they may try to rescind or undermine the ban, as unpopular as that may be. In addition, the Trump administration’s practice of rolling back Obama’s executive actions suggests that the next Republican administration will target Biden’s labor agenda.
Given this uncertainty, states would do well to act preemptively to lock in workers’ gains, by passing supplemental legislation to ban noncompete agreements, ensuring widespread enforcement and heading off reversals by future administrations. Legislators can also take this opportunity to address other anti-competitive employment contract terms.
Over a dozen states have already passed versions of the FTC’s new policy; California’s has been in place since the 19th century. These natural experiments laid the groundwork for federal reform by showing that banning noncompetes increases workers’ bargaining power, mobility, and makes it easier to start new businesses. In fact, some analysts credit the noncompete ban in California with the rise of Silicon Valley as a hub for innovation in the tech economy.
Over a dozen states have already passed versions of the FTC’s new policy; California’s has been in place since the 19th century.
If a future Republican administration targets the noncompete ban, or if the Supreme Court finds a way to overturn it, workers in states without noncompete policies risk losing thousands of dollars in income. To prevent this, state legislators should capitalize on the FTC’s momentum to enshrine these protections into law and protect workers from related anti-competitive contracts.
Complementary bills must consider that even a properly motivated FTC may not have the resources to enforce the noncompete ban on every employer in America. Another worry is that a future FTC or Justice Department could simply divert funding away from enforcement and, in turn, quietly transfer tens of billions of dollars from workers back to their bosses.
States can shore up federal enforcement by following states like Nevada that implement a private “right of action,” a provision that allows current or former workers to sue their employer for enforcing an illegal noncompete agreement. Nevada’s law also requires courts to award attorney’s fees and costs for successful challenges. Other states like Colorado go further by making the act of presenting a worker with a noncompete actionable and requiring employers to pay damages for violating the ban. States should also follow Colorado in authorizing state attorneys to enforce their noncompete ban, so that companies cannot use arbitration or choice of law provisions to circumvent the law.
Although voiding noncompetes is a concrete first step, California’s experience demonstrates that such measures are, alone, insufficient. Their system voids noncompetes without penalizing businesses that continue to include them in their contracts. Anyone with a noncompete agreement in their employment contract can get it voided, but the consequence of California’s enforcement regime is that 45 percent of state businesses continue to threaten workers with noncompetes that they could never back up in court. California Attorney General Rob Bonta has, unsurprisingly, spoken out against this behavior, and supports penalizing lawyers who knowingly include these void noncompetes. The state legislature could back up Bonta by confirming that businesses will suffer penalties from including noncompetes.
Finally, states should take this opportunity to crack down on related anti-competitive employment contracts and practices that depress workers’ wages and reduce their bargaining power. States should address nonsolicitation agreements, nondisparagement agreements, and restrictions on worker disclosures of wages and benefits. They can also ensure that state enforcers have the tools and funding to combat employers who collude to fix workers’ wages and enter no-poach agreements. Even when such legislation duplicates federal law, it still locks in workers’ gains and allows states to enforce these rules across administrations.
To ensure the FTC’s ban is effective and long-lived, legislators must act to enshrine these protections into state law.
