Non Competes, The Great Debate
The proposal in front of the FTC is not a new one. For those of you who followed Biden’s early Presidency, in 2021 he signed an executive order that encourages the Federal Trade Commission (FTC) to ban or limit noncompete agreements. The order was meant to promote competition and economic growth by making it easier for workers to change jobs, among other objectives. I’m not sure that I’ve seen any significant change in non-compete and non-disclosure agreements use in the distribution industry since then. A majority of states currently recognize the enforceability of non-compete agreements to some extent. Generally, these agreements prohibit employees from working in the same or similar profession for a period of time following the termination of the employment relationship.
For example, Florida recognizes that non-competes serve legitimate business interests, including protecting an employer’s trade secrets, confidential business information, client relationships and the company’s goodwill. So, in Florida, non-competes are generally enforceable, provided they are “reasonable in time, area, and line of business.” On the other hand, California law provides “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void” Other states have taken a more middle-of-the-road approach. For example, in Maine, the use of non-compete agreements amongst low-wage workers (defined as those earning at or below 400 percent of the federal poverty level) is prohibited. Seems like a lot of math. In 2023, the IRS had upped their definition of “highly compensated employees” from $135,000 to $150,000.
On Jan. 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking that seeks to align the nation closer to California’s approach. The proposed rule would prohibit an employer from entering into or attempting to enter into a non-compete clause with a worker; maintaining any existing non-compete clause; or, under certain circumstances, representing to a worker that the worker is subject to a non-complete clause. The sole exception is where the party restricted by the non-compete clause is an owner, member or partner holding at least a 25 percent ownership interest in a business entity. The notice clarifies, however, that non-disclosure agreements (NDAs) and non-solicitation agreements would not be included in the rules grasps unless such agreements are so broad in scope that they function as a non-compete.
FTC Chair Lina Khan issued a statement describing the perceived issues with non-competes. First, the FTC estimates the proposed rule would increase employee earnings by close to $300 billion per year due to increased marketplace competition. Also, the FTC found non-competes reduce innovation and competition in products and services by reducing entrepreneurship and new business formations while driving up costs for existing products and services. As to the products and services market, the FTC notes these labor markets are fluid and spread across state lines.
Although the FTC addresses some concerns that may arise if the proposed rule goes into effect (i.e., ensuring that employers maintain an ability to safeguard trade secrets through NDAs or non-solicitation agreements), several equally important concerns remain. For example, employers must now consider how they will safeguard their investment in employee training and career mentorship. Further, non-compete agreements are sometimes leveraged by employees to secure higher wages that the employer would not have agreed to without the restriction. Finally, the proposed rule prohibits the maintenance of non-compete agreements and with it, essentially rewrites millions of employment agreements across the country.
The proposed rule provides interested parties 60 days to submit comments for the FTC’s consideration before the rule is finalized. I can’t imagine how many comments they’ve received. Employers and other interested parties may engage counsel to help draft and submit comments expressing any concerns that the FTC should take into account before a final rule is issued.
I see this issue from both sides, although, in my opinion, an employee making $87,000 a year can download your entire customer database and pricing just as easily as one making $150,000, they just may fly lower under the radar. In my firm, this type of breach would cripple my business and for those who are supported by my efforts, devastating as the only recourse is litigation. Based on what I’ve read, that process could take years. Imagine how long it would take you to replicate the last 10 or 20 years of customer data, SPAs, rebates, employee records and the like…it’s crazy making. Regardless of how things fall with this new proposal, we will still require new employees to sign non competes and I expect the industry will continue to follow suit.