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AND THEN WHAT?

FTC-1

The Federal Trade Commission has proposed a ban on noncompete agreements, viewing such agreements as unfair methods of competition. 

The Federal Trade Commission proposed a new rule that would ban employers from imposing noncompetes on their workers, a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. By stopping this practice, the agency estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.

The FTC is seeking public comment on the proposed rule, which is based on a preliminary finding that noncompetes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said Chair Lina M. Khan. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

“Research shows that employers’ use of noncompetes to restrict workers’ mobility significantly suppresses workers’ wages—even for those not subject to noncompetes, or subject to noncompetes that are unenforceable under state law," said Elizabeth Wilkins, Director of the Office of Policy Planning. “The proposed rule would ensure that employers can’t exploit their outsized bargaining power to limit workers’ opportunities and stifle competition.”

The evidence shows that noncompete clauses also hinder innovation and business dynamism in multiple ways—from preventing would-be entrepreneurs from forming competing businesses, to inhibiting workers from bringing innovative ideas to new companies. This ultimately harms consumers; in markets with fewer new entrants and greater concentration, consumers can face higher prices—as seen in the health care sector. <Source>

Purpose…

A non-compete agreement is a legal contract between an employer and an employee in which the employee agrees not to work for a competitor of the employer for a certain period of time following the end of their employment. The purpose of a non-compete agreement is to protect the employer's business interests, such as trade secrets, client relationships, and confidential information, by preventing the employee from using that information to benefit a competing business.

Advantages…

There are several advantages of non-compete agreements:

  1. They can protect a company's confidential information, such as trade secrets and client lists, from being used by a former employee to benefit a competitor.

  2. They can prevent employees from using their knowledge and expertise gained while working for a company to start a competing business.

  3. They can provide a company with a competitive advantage by limiting the ability of former employees to work for competitors.

  4. They can help to ensure that employees do not take advantage of the training and resources provided by a company, and then leave to work for a competitor.

  5. They can serve as a deterrent for employees who may be considering leaving a company to work for a competitor, as they will know that they will be restricted from doing so for a certain period of time.

  6. They can be included as a clause in an employment contract or in a separate document, which can provide a legal framework for action in case of violation.

Disadvantages…

There are several disadvantages of non-compete agreements:

  1. They may limit an employee's ability to find work in their field of expertise, which can be detrimental to their career and earning potential.

  2. They can also restrict competition in a given market, which can limit consumer choice and stifle innovation.

  3. They may be difficult to enforce, especially if the employee is not provided with compensation or other benefits in exchange for signing the agreement, or if the agreement is overly restrictive.

  4. They may deter talented individuals from working for a company or cause existing employees to leave.

  5. They can be challenged in court, and if found to be overly broad or not reasonable, may not be enforced by the court.

  6. Some states may have laws that restrict the use of non-compete agreements, and if an agreement is found to be in violation of such laws, it may be unenforceable.

And then what?

Unfortunately, most government agencies promulgate rules and regulations, enforced by costly penalties, that come with unintended consequences, many of which are glossed over or ignored by bureaucrats.

There is no question that noncompetes can limit an individual's ability to use their skills and knowledge to earn a living, which is considered a property right. But what protects the company that has invested a considerable amount of time and effort training an employee in a highly marketable skill only to see them jump ship and apply that costly expertise to a competitor’s benefit?

A recent example …

An experienced machinist, highly competent in manual and semi-manual machining methods is sent through an expensive and time-consuming series of software and hardware courses that allow the machinist to create engineering-level drawings for new and existing products and then process those drawings into the intricate instructions used to drive complex numerically-controlled machine tools such as lathes, milling machines, and other tools – followed by a costly process of gaining operational experience using different toolsets and feedstocks. 

What keeps that individual from using that specific knowledge from joining a direct competitor, allowing it to immediately jump the learning curve and avoid employee training expenses?

Bottom line…

At risk are the federal usurpation of 47 state laws and the nullification of an estimated 30 million non-compete contracts.

The FTC acknowledges the rule would reduce capital investment, worker training, and possibly job growth while increasing the wage gap.

What gives the Federal Trade Commission the statutory authority to alter state laws and to promulgate agency rules that have “vast economic and political significance?" Clearly, questions of employment are decisions for Congress. 

While I take no position for or against specific industry noncompete agreements, especially in the personal services industry, I must ask a few questions.

  • Will this rule usurp Congressional powers and abrogate states' rights?
  • Will this FTC rule have significant unintended consequences and disrupt the labor market during economic fragility?
  • Might some of these knowledgeable and highly-skilled employees be enticed away from critical positions in the defense industry or other essential areas to serve our enemies operating U.S.-based front groups?

Considering the politicization of government agencies and the preponderance of amoral partisan lawyers with few core values, I suggest we are about to be, once again, screwed by a federal agency power grab.

-- Steve


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