The Federal Trade Commission has proposed an all-encompassing nationwide ban on non-compete clauses between employers and their employees or independent contractors. The proposed rule, which was announced on January 5, 2023, would have widespread consequences across nearly all sectors of the American economy, including the pool and spa industry.
A non-compete clause is a contractual arrangement between an employer and a worker that blocks the employee from working for a competing employer or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends.
The FTC declares this “an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; to maintain with a worker a non-compete clause; or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.”
President Biden supports the move. “These aren’t just high-paid executives or scientists who hold secret formulas for Coca-Cola
Recognize the man on the right? That’s Mike Rowe from the TV show ‘Dirty Jobs’ standing with a proud Dan Duker, owner of Vinyl Pools LLC, of West Palm Beach, Fla., who was featured on the show in season 10, episode 1, ‘Pool Fixer’. See story on page 8. so Pepsi can’t get their hands on it,” Biden said in a speech about competition in 2021. “A recent study found one in five workers without a college education is subject to non-compete agreements. They’re construction workers, hotel workers, disproportionately women and women of color.”
The commission points to studies that indicate the use of non-compete clauses is interfering with competitive conditions in labor markets. Studies suggest a ban on non-compete clauses could increase workers’ earnings by anywhere from 3 to 14 percent.
“Because non-compete clauses prevent workers from leaving jobs and decrease competition for workers, they lower wages for both workers who are subject to them as well as workers who are not. Noncompete clauses also prevent new businesses from forming, stifling entrepreneurship, and prevent novel innovation which would otherwise occur when workers are able to broadly share their ideas,” the commission stated.
The proposal is unsurprisingly controversial, and thousands of comments have already been submitted to the FTC in favor of or opposed to the rule.
A random examination of comments submitted found the ban was highly supported by those working in the healthcare sector, such as doctors, nurses, and veterinarians.
A doctor said he was prohibited by a non-compete clause from helping out at an additional hospital at the height of the COVID pandemic.
A spine surgeon said he’d been threatened with termination for questioning his employers and is simultaneously threatened with a multiyear noncompete. “As a spine surgeon, there are no trade secrets or formulas that are protected by a non-compete agreement. The skills to perform delicate operations on a patient’s spine are not property of a healthcare system or medical practice. However, a non-compete agreement effectively makes this the case,” he wrote.
A veterinarian was fired when he argued that he hadn’t been paid overtime but was prohibited from seeking employment in his profession for a 50-mile radius for 2 years.
Some comments off e r e d compromises to a complete ban. One person suggested that an exception should be made for non-compete contracts that fairly compensate the former employee. “For a period of up to 2 years the former employer could pay the former employee not to compete. The payment should be at least as much as the employee received during employment or fair value for his work, whichever is greater,” he wrote.
However, many employers argue that it isn’t fair to small business owners who paid for the training of their employees, which enables them to compete in the first place. Furthermore, they say, it will only benefit large businesses that can afford to pay higher wages.
“The FTC’s attempt to interfere with the operations of law-abiding, good community small business is reprehensible,” one person commented. “In the current climate of entitlement, it seems the workforce thinks the employer should have no rights to protect their company, investment, or trade secrets. Currently we have an employee who is being courted away by a national competitor because they want his knowledge of our industry and someone who knows our customers.”
“There is a tremendous cost we invest in each employee,” another person wrote.
Many questioned the government’s right to get involved in the first place.
“We are in a free country, and as such have a free market, capitalist society. This free market allows for all of us to enter into agreements without government or third-party interference. Government in our country has no constitutional right to enter into either side of this matter. Each of us as citizens of a free country have every right to negotiate our own employment deals, no matter which we are — employer or employee. Free-market capitalism allows for freedom of choice, which this idea obliterates,” one wrote.
Within the pool and spa service industry, perhaps the biggest issue with totally banning non-compete agreements is the threat of employers losing their customer base to former employees, which many people commenting to the FTC’s proposal addressed.
“When a person leaves one employer and immediately goes to another within the same field, that person should not be able to take a customer list and call customers they serviced. Some customers want the same person. So, if their sales person or technician, mechanic, or whatever the field may be leaves one and goes to another, all customers could change over to the new business. This would not be good business. How would you protect businesses from employees who quit and move to another company? That would also have to be addressed,” a commentor wrote.
The owner of a family-owned distribution business said that while he supports the ban on noncompete clauses, he also supports non-solicitation agreements. “If our employees feel that their lives would be better with a different employer, we respect it. But we don’t want them leveraging the relationships made carrying our family’s name,” he wrote.
At the very least, it seems evident that a sweeping ban on non-compete agreements should be refined to address non-solicitation issues and should be tailored to specific industries.
Should the spinal surgeon, who spent a decade as well as thousands of dollars investing in his own education, be prevented from working wherever he wants?
At the same time, isn’t it unfair for a service company to lose customers to employees who gained their relationships only through their prior employers?
The “ Notice of Proposed Rulemaking (NPR) for the Non-Compete Clause Rule” follows a preliminary finding by the FTC that non-compete clauses are an “unfair method of competition” and therefore violate Section 5 of the Federal Trade Commission Act.
The NPR follows the FTC’s November, 2022, statement that the commission would rededicate itself to executing the full set of duties — with special attention to Section 5 — that congress tasked it with when it passed the FTC Act in 1914. When the act was passed, it empowered the FTC to enforce antitrust laws and charges the agency with preventing unfair or deceptive trade practices. Section 5 of the act provides that unfair methods of competition in or affecting commerce are unlawful.
The NPR also follows President Biden’s July 2021 executive order that directed the FTC to “exercise statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.”