Non-compete agreements are unfair, but new rule won’t help

Against a background of a labor shortage, low workforce participation rates, decreased geographic mobility and long-term declines in self-employment, a new Federal Trade Commission proposal to ban worker non-compete agreements has much to recommend in principle. Unfortunately, the way the administration is moving the proposal forward and the specifics of the proposal leave much to be desired.

First, some background: Non-compete agreements, particularly when offered early in a worker’s career with a given company, restrict freedom to move between jobs by banning them from working for competitors and/or in a particular geography.

This practice is fundamentally at odds with the principle of at-will employment, which is the basis of American labor law and has helped produce the highest GDP per capita and median household income in the G-7.

The contradiction is stark. If an employer can dismiss an employee at any time for almost any reason, why shouldn’t employees have the equal liberty to seek better opportunities whenever they want? 

And they’re bad for the economy: Non-competes reduce worker earnings and business startups. California provides a case study of how eliminating non-compete agreements proved an economic boon. The state’s longstanding refusal to enforce non-compete agreements let Silicon Valley emerge as a global epicenter of innovation since people working for one company could always leave and explore some innovative idea. The lack of non-competes continues to draw people to work and start companies in California.

For all the merits of eliminating or reforming non-competes, however, the FTC does it incorrectly.

First, the proposal being put forward is a rule issued by the FTC, not an act of Congress. As such, a future FTC could eliminate it using the same administrative process used to implement it. Particularly for people leaving a job while seeking investments in startup enterprises, this creates tremendous uncertainty. 

And the federal courts’ increased skepticism toward granting huge power to administrative agencies makes this worse, as the FTC is arguably acting beyond its legal powersin issuing this rule without congressional authorization. The FTC’s process, furthermore, is largely shielded from the horse trading and democratic accountability of actual lawmaking and may miss things that the people’s elected representatives would notice.

This isn’t a theoretical threat; the proposed rule has flaws. The rule exempts existing non-competes for “senior executives,” a loosely defined category that potentially encompasses a wide range of high-wage earners. This carve-out, combined with the uncertainty of the rule’s permanence, means that non-compete enforcement will linger, affecting substantial workforce segments for years to come. While there may be some problems with any regulation that nullifies an existing contract, the rule will still be open to that challenge because it does nullify existing contracts of lower-wage workers.

Even worse, unlike a similar proposal called the Workforce Mobility Act that has attracted bipartisan support in Congress, the rules don’t allow workers at the highest levels to voluntarily negotiate mutually beneficial “buyouts” on their way out the door. While non-competes as a condition of getting a job in the first place are always unfair, they can be an important bargaining chip for highly skilled employees who are leaving a job. Not giving the most highly paid employees the option of signing short-term non-competes when leaving dilutes their bargaining power.

While the administration’s intentions deserve some credit, they’ve picked the wrong means to achieve their goal. Congressional action, not administrative fiat, should be used to reform this unfair practice for good. A law implemented by Congress, or more state-level reforms, might take longer and not solve every problem, but they would provide the certainty and nuance the FTC rule lacks. 

A bolder, clearer approach is needed — one that aligns with the principles of fairness and freedom essential to individual rights and economic prosperity. Congress must eliminate these terribly unfair contracts and ensure that all workers have the freedom to develop fulfilling, remunerative careers.