The Death of the Non-Compete Clause May Be Imminent

Sandeep Vaheesan

Sandeep Vaheesan is the legal director at the Open Markets Institute.

Daniel Hanley

Daniel A. Hanley is a senior legal analyst at the Open Markets Institute.

According to a 2019 survey, as many as 60 million working people in the United States are subject to non-compete clauses. These contracts prevent workers up and down the income scale and across occupations from leaving for a better job or starting their own business in their own community, state, or even anywhere in the country. Non-compete clauses rob workers of a critical source of leverage—the effective right to leave—and depress wages and wage growth over time and lock people into abusive and discriminatory work environments. But their end may be near. After years of research, reporting, and advocacy (including by our organization the Open Markets Institute), federal regulators and state legislatures took major steps to eliminate these coercive contracts in 2023. While major policy and legal fights lie ahead, 2024 may be the year in which we finally eliminate these contracts in the United States.

The Federal Trade Commission started 2023 with a bang, by proposing on January 5 to outlaw non-compete clauses. The proposal included no carve-outs based on income or occupation, so all workers, whether an Uber driver or a neurosurgeon, would be protected. The FTC is reportedly on track to publish a final regulation this spring. This rule, if in line with the proposal, would free all workers from conventional non-compete clauses. On top of this regulatory effort, the FTC last year nudged several employers to cease using these contracts with their workers.

Later in the year, the National Labor Relations Board followed suit. In the spring, the agency’s general counsel, Jennifer Abruzzo, published two memos directing her staff to file cases against employers that use non-compete clauses. In one of the memos published last May, Abruzzo stated that these contracts can violate the National Labor Relations Act, as they can “reasonably tend to chill employees in the exercise” of their rights under the act. Abruzzo highlighted several issues caused by non-compete clauses, including their potential to restrict employees from seeking alternative employment and organizing. Her staff filed a complaint in September against a cosmetics company imposing broad non-competes and other restrictive contracts on workers that prevented them from finding new employment and deterred them from discussing the terms and conditions of their current employment. In January, the company agreed to drop the challenged contracts. While the NLRB does not have authority over independent contractors and workers with supervisory powers, it can still abolish non-compete clauses for millions of workers in the private sector.

In December, the Department of Labor proposed to ban non-compete clauses for all workers in apprenticeship programs.

State governments did not stand still in the meantime. Several states, including California where non-compete clauses have long been unenforceable in court but not illegal, banned or otherwise restricted the use of these contracts. Minnesota enacted a law in May that outlawed non-competes for all workers in the state. New York appeared poised to join Minnesota at the end of the year, but Governor Kathy Hochul dashed legislators’ hopes. After sitting on the bill for months and refusing to indicate her position, she vetoed a bill in December.

For all the progress made last year, the fight is not over. The courts are an obstacle to the FTC, NLRB, and DOL efforts. Conservative judges are likely to look askance at efforts to tilt labor market power in favor of workers. But the courts are not of a piece: not every appellate judge is a reactionary Trump appointee looking to smite the administrative state, particularly when it undertakes progressive actions. And very few cases go up to the Supreme Court. Federal regulators should not refrain from pursuing bold regulatory actions out of fear of being struck down by the judiciary.

But even before courts decide on whether to uphold non-compete bans, key policy questions are not fully resolved. The substance of the FTC and DOL final rules, NLRB decisions, and legislation in some states is still up in the air. In figuring out what to do, lawmakers and regulators need to follow two principles.

First, they need to ban these contacts for all workers. Extensive research, compiled and summarized by the FTC in its notice of proposed rulemaking, shows that these contracts hurt low-wage workers and high earners alike. And while employers commonly assert that they need non-competes to protect trade secrets, invest in worker training, and maintain customer relationships, such justifications do not withstand close examination. Employers already possess specialized legal instruments, such as trade secret law and non-solicitation agreements, to safeguard proprietary information. Viva Moffat writes that using non-competes, as a means of bolstering protection of intangibles, is the “wrong tool for the job.” They are a crude instrument: In the name of employers protecting information, which may be trivial or stale, non-compete clauses impair workers’ right to leave, thereby depressing wages and wage growth, as well as business formation. And yet, they do not prevent covert disclosures of confidential information. They restrain human beings but do not necessarily protect knowledge and knowhow.

Managers also have better, more socially beneficial methods of retaining workers than imposing non-competes on them—like paying and treating staff well and rewarding good work with raises and promotions. Accordingly, policymakers need to stand their ground against employer pressure and prohibit non-compete clauses for all workers.

Second, lawmakers and regulators need to ban both conventional non-competes and newer equivalents such as training repayment agreement provisions or TRAPs. Instead of preventing workers from accepting “competitive” positions, contracts such as TRAPs compel workers to pay their employers substantial sums of money for arbitrarily imposed costs in the event of a departure. A report published by the Consumer Financial Protection Bureau last July stated that such restrictive contracts force workers to become “indebted to the employer or an affiliate as a condition of employment.” By requiring workers to pay thousands or even tens of thousands of dollars, in a lump sum or over time, in the event of a departure for any reason before a stipulated date, employers coerce employees to stay put at least as effectively, if not more so, than traditional non-compete clauses. The Student Borrower Protection Center found TRAPs are common in healthcare, retail, and transportation.

Just as the NLRB targeted these contracts in its complaint against the cosmetics company discussed above, the FTC should prohibit these functional non-competes in its final rule. Failure to do so may encourage employers to substitute these new non-competes for the old-fashioned kind. Indeed, reading the writing on the wall, lawyers are advising their employer-clients to use TRAPs instead of traditional non-compete clauses.

The fight against non-compete clauses from the U.S. labor market made huge strides in 2023. Having made targeting non-competes a priority, three federal agencies appear poised to abolish these contracts this year, while many state legislatures are keen to free workers from these contracts too. The final chapter in the fight against non-compete clauses is yet to be written. But we may be there soon.

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