Architectural Columns

What’s Going On With Non-Compete Agreements?


            You may have heard about the Federal Trade Commission’s Final Rule banning non-compete clauses, which issued on April 23, 2024. What does that mean for workers two months later? So far…well, read on.

            What is a non-compete? A non-compete (or noncompete, depending on who is spelling it) is a form of restrictive covenant, which is a way of restricting activity after a transaction or legal relationship has ended. The most basic form of a non-compete prohibits an employee at Company A from going to work for Company B for a period of time after the employee no longer works for Company A.

            Yes, you read that right. Company A wants to control the employee after the employee no longer works for, and is no longer paid by, Company A. Simply put, if a worker is unhappy in the job and wants to move on to a better opportunity, a non-compete stops that from happening. Workers who violate these clauses can face hundreds of thousands of dollars in liquidated damages, injunctive relief, attorneys’ fees, and the total destruction of their careers.

If this seems perverse to you, join the club. As long ago as 2016, the New York State Attorney General reached an agreement with Jimmy John’s, following an investigation into the sandwich company’s practice of distributing two-year non-competes to sandwich makers. The AG put a stop to the practice, observing that these things “…limit mobility and opportunity for vulnerable workers and bully them into staying with the threat of being sued.” The New York State AG’s efforts notwithstanding, non-competes continue to be used to limit worker mobility in a variety of industries.

            Is that even legal? Here’s what happens. Say a worker gets a job at a sandwich shop. On the worker’s first day, there’s something called “orientation” or “onboarding” or “training.” During this process, the worker has to sign a dozen or so documents, such as W-4s, I-9s, acknowledgments, etc. One of those documents might be some kind of restrictive covenant. The employee may not even know they signed it. And the employee does not have a choice in the matter: no signature, no job. So the employee signs so they can hurry up and get to the sandwich-making.

Officially, while most employment documents have been deemed by the courts not to be  binding contracts, historically, non-competes have been held to be enforceable because, so the logic goes, in return for providing the worker the sumptuous privilege of being paid to make sandwiches, the employer is entitled to extract several years of the employee’s life force. According to the traditional legal analysis, it’s a bargain. And unless a statute specifies otherwise, parties can usually bargain away their own rights, which is why it’s a darn good idea to have an attorney review things before you sign them.

            Realistically, the employee has gotten no opportunity to bargain. The employee needs that sandwich-making job to make their car payment and will sign anything to get that paycheck. Sure it’s a contract. It’s also patently unfair.

            What happened?  The FTC, after several months of gathering commentary, concluded that non-competes are…well…non-competitive. The FTC doesn’t like stuff that interferes with competition. Hence the rule. (This paragraph is a very watered down version of the 570-page rule. Check out pages 11-14 for some real-life examples of how destructive a non-compete can really be.)

            Where are we now? First of all, the rule doesn’t become effective until 120 days after it’s published in the Federal Register, which means even if no one hated this rule it wouldn’t go into effect until around September 10.

            Second, employers couldn’t move fast enough to take the FTC to court. An accounting firm beat everyone else with Ryan, LCC v. Federal Trade Commission, pending in the Northern District of Texas. The Chamber of Commerce (which, by the way, couldn’t name any employers who were actually hurt by the rule) filed its own case in the Eastern District of Texas but lost out because Ryan got there first. But the COC is being allowed to join the Ryan case, so that’s nice for employers.

            Where this leaves the rest of us is that, while we don’t have any crystal balls, decisions coming out of Texas courts recently have not been overwhelmingly progressive. On the other hand, even rich people are sometimes annoyed by non-competes. But then again, employers are already figuring out work-arounds…so don’t pop open the workers’ rights champagne just yet. But go ahead and leave it in the fridge door; we might end up having a use for it in a couple months!

            Who knows what will happen between now and September, so if you’re wondering what this means for your particular situation, make sure you speak with a workers’ rights attorney in your jurisdiction. Fingers crossed.

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