The Biden Administration plans to issue an executive order calling on the Federal Trade Commission (FTC) to adopt rules to limit the use of noncompete clauses in employment agreements. According to Axios, White House Press Secretary Jen Psaki told reporters that “roughly half of private sector businesses require at least some employees to enter noncompete agreements, affecting over 30 million people. This affects construction workers, hotel workers, many blue-collar jobs, not just high-level executives. [President Biden] believes that if someone offers you a better job, you should be able to take it. It makes sense.” Indeed, in 2016, then Vice President Biden went on the record that “no one should have to sit on the sidelines because of an unnecessary non-compete agreement.” While the intervening years have not seen any federal action on non-competes, a number of states have enacted legislative changes to narrow the scope and availability of noncompete agreements.
The United States has also seen continued market concentration and alleged impairments on worker mobility and competitiveness. This consolidation has, as the New York Times reported, energized an “increasingly influential school of thought in left-of-center economic circles” that “corporate mergers and some other common business practices have made American workers worse off. The government, this theory holds, should address it.”
We have written previously about various interest groups lobbying the FTC to issue rules banning non-competes, including various state attorneys general. And the FTC has held workshops to consider its authority to do so, the purpose of which was to “to examine whether there is a sufficient legal basis and empirical economic support to promulgate a Commission Rule that would restrict the use of non-compete clauses in employer-employee employment contracts.” As we wrote at the time, “[w]hy the FTC now wants to regulate in the employment space is not readily apparent apart from attempting to capitalize on a low-hanging fruit populist issue concerning the overreporting of some companies allegedly using non-competes with low-wage workers.”
We have the same question now, although it is not surprising that the Biden Administration would take this step given that then President-Elect Biden issued a “Plan for Strengthening Worker Organizing, Collective Bargaining, and Unions” on his campaign website in late 2020 (which we wrote about and spoke with the Financial Times about at the time) that included an interesting statement about what his incoming administration planned to do about non-compete and no-poach agreements:
Eliminate non-compete clauses and no-poaching agreements that hinder the ability of employees to seek higher wages, better benefits, and working conditions by changing employers. In the American economy, companies compete. Workers should be able to compete, too. But at some point in their careers, 40% of American workers have been subject to non-compete clauses. If workers had the freedom to move to another job, they could expect to earn 5% to 10% more—that’s an additional $2,000 to $4,000 for a worker earning $40,000 each year. These employer-driven barriers to competition are even imposed within the same company’s franchisee networks … As president, Biden will work with Congress to eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets, and outright ban all no-poaching agreements.
It remains unclear what “narrowly defined category of trade secrets” this would encompass—if the forthcoming executive order intends to follow the President’s prior policy statement—but it appears we will know more soon when President Biden signs the executive order. Any executive order is unlikely to yield an immediate change to non-compete enforcement. It appears that the executive order will call on the FTC to engage in rulemaking, which will take months or years to go through the administrative rulemaking process. Moreover, any promulgated rule is likely to face challenges to the FTC’s ability to promulgate rules restricting non-competes, which may negate or delay the end product of the FTC’s process.
We will continue to monitor the situation and keep you updated as it progresses. The administration has indicated that the executive order should be released in the next few days, and we will follow up with an analysis of the executive order when it is released.