On January 5th, 2023, the Federal Trade Commission (FTC) announced a proposed rule banning non-compete agreements, as well as the settlements it reached with companies for alleged abuse of non-compete agreements. 

The FTC will publish the proposed rule in the Federal Register and comments will be allowed for 60 days. If the rule is adopted, compliance with the new rule will be required beginning 180 days after the publication of the final rule. 

FTC Proposal to Ban Non-Compete Agreements with Employees 

The January 5th notice of proposed rulemaking aims to eliminate non-compete agreements in every state.  Some states, including California, already have broad bans on non-compete agreements for most or all workers. 

The FTC listed several main goals of their rule proposal, including raising wages for lower and middle-income workers who are increasingly seeing non-compete agreements added to more job types, and concerns over competition. 

Non-Competes Reduce Wages 

The FTC estimated the proposed rule could raise wages by up to $300 billion per year.  They also pointed to research that estimated a 4-9% decrease in racial and gender wage gaps by removing non-compete agreements. The wage loss can affect more than those with a non-compete agreement. By preventing job movement of one worker, another worker cannot move to fill the role at the firm that was vacated. 

Non-Competes Reduce Competition 

Non-compete agreements that do not allow a worker to work for a competitor can reduce the amount of skilled labor a company can hire to enter a market.  If a specific product or market requires experienced workers in the field to join the new company or new division, banning all employees from job switching effectively blocks the market entry of the potential competitor. Decreased competition is associated with higher prices and reduced innovation. 

Examples of Non-Competes Reducing Wages or Job Opportunities 

The FTC proposal listed multiple examples where alleged non-compete agreements unnecessarily harmed a worker: 

• “Michael, a single father, found work as a security guard for a Florida firm. A few weeks after accepting the job, which paid around $11 an hour, his overnight childcare fell through, and he resigned. Months later, he took a job as a daytime security guard at a bank making almost $15 per hour. But his new employer let him go when the previous employer sent a letter stating that Michael had signed a two-year noncompete.” 
• “Keith, a factory manager for a textile company, saw his paycheck dry up after the 2008 financial crisis. A rival textile company offered him a better job and a big raise. A 2 noncompete blocked him from taking it. Keith fought the noncompete, but the three-year legal battle wiped out his savings.” 
• “A phlebotomist (a technician who draws blood for blood testing) drove long hours around upstate New York performing physical exams and collecting specimens. She was offered a job by a clinical lab that offered more regular hours, higher pay, and no travel requirements, but the offer was rescinded when the company discovered she was subject to a noncompete.” 

FTC Action Against Companies Allegedly Abusing Non-Compete Agreements 

The FTC took legal action against three companies: Prudential Security, Ardagh Group S.A. and O-I Glass. 

FTC Settlement with Prudential Security 

Regarding Prudential, the FTC alleged that the owners required security guards to sign contracts restricting them from working with a competing business within 100 miles of their job site. The employment contract stipulated that the ban would exist for two years after the employee left the job. Further, the contract noncompete clause included a damages section, requiring the worker to pay  Prudential $100,000 as a penalty for any violations. 

According to the FTC, Prudential Security made good on these threats by suing individual employees and their new employers and preventing employees from leaving jobs for higher pay.  Many of the Prudential Security guards were making near minimum wage.  A Michigan state court ruled the employment agreements were unreasonable and thus unenforceable. 

While Prudential sold to another company in 2022, approximately 1,500 security guards who left Prudential were still subject to non-compete agreements.  The FTC reached a settlement with Prudential, barring Prudential from enforcing the non-compete agreements or threatening to enforce the agreements, as well as notify former employees. 

 FTC Settlement with O-I Glass and Ardagh Group S.A. 

The FTC alleged in its complaint that two manufacturers of glass beverage and food containers both used non-compete clauses in employment contracts to restrict competitors, including competitor entry into their market. 

A market entry by a new firm would require experienced and skilled workers, but non-compete agreements such as the ones alleged to be used by Ardagh Group S.A. required workers to agree to not perform “same or substantially similar services” to companies anywhere in the United States, Mexico or Canada. As a result, workers believed they could not work for any competitor existing or future. 

Non-Compete Agreement Lawyer 

If you have questions about a non-compete agreement or you have discovered a no-poach agreement between your employer and another company, you can contact our attorneys for a free legal consultation. For more information about resolving complex employment law disputes, schedule an appointment with our knowledgeable employment litigation lawyers at Schneider Wallace.