New balance

President Joe Biden is asking the Federal Trade Commission to ban or limit non-compete clauses, which prevent millions of workers across the nation from going to work for their employers’ rivals. The move was hailed by labor rights groups who contend that the provisions limit opportunities for many workers, especially lower paid employees. But business groups contend that the agreements are vital to protect their interests, stay competitive in the market and not unfairly lose out to direct industry competitors.

The White House is also asking both the FTC and the U.S. Department of Justice to ban “unnecessary” state occupational licensing requirements, which the administration contends make it harder for otherwise qualified workers to find a job in other states.

“Capitalism without competition isn’t capitalism; it’s exploitation,” the first-term Democrat said in remarks announcing the order on July 9. “Without healthy competition, big players can change and charge whatever they want and treat you however they want.”

“These aren’t just high-paid executives or scientists who hold secret formulas for Coca-Cola so Pepsi can’t get their hands on it,” said Biden. Instead, the affected employees are low-paid workers with little negotiating power and scarcely in a position to refuse the mandates, the president said.

Non-compete clauses are common both in New Jersey and across the nation. Their use varies across industries. Laws regulating the provisions are largely left to the states, so the administration could be headed for litigation over the order, suggested Anthony Anastasio, president of the New Jersey Civil Justice Institute.

“The federal courts are often skeptical of federal agencies exerting their power in this manner,” Anastasio said in a statement. “A one-size-fits-all approach to non-compete agreements is at odds with a sophisticated, information-driven economy.”

NJBIZ reported in March that of the roughly 100,000 people who remain out of work in New Jersey due to the pandemic, approximately 20,000 are likely bound by non-compete agreements according to “Noncompete Agreements in the U.S. Labor Force,” a paper published in the Journal of Law & Economics in 2019.

In its July 9 announcement of the executive order, the White House cited a 2019 report by the left-leaning Economic Policy Institute – a Washington, D.C. think tank – a which estimates that between 36 million and 60 million Americans are bound by some type of non-compete agreement. EPI surveyed 634 employers and found that nearly half of workplaces in the Garden State – 48.8% – subjected at least some of their workers to a non-compete agreement. A quarter of New Jersey workplaces – 25.6% – had a non-compete agreement in place for all of their workers.

Businesses contend that non-compete agreements are vital to keep executives from jumping ship and diverging company secrets to their competitors. “The employer runs the risk of letting people go and maybe … that person could start to work for a competitor the next day,” said Tom Bracken, the CEO of the New Jersey Chamber of Commerce. “If that employee is in a sales capacity and has a customer-following, they could have customers follow that person the next day to another company.”

“So there’s always that negative from the company-standpoint,” he said.

But, Bracken added, “it does allow people to go from job to job and not have any interruption in their career.”

As for licensure, Andrew Berns, an employment law partner at Denville’s Einhorn Barbarito Frost & Botwinick, said the existing state requirements are a “bureaucratic hassle … which often simply raise funds for the state without any benefit to the workers and are unnecessary for many positions in which you simply pay for a license to perform a service without having to demonstrate any competency or a particular skill.”

As Biden put it, “if you want to braid hair and you move from one state to another, sometimes you have to do a six-month apprenticeship, even though you’ve been in the business for a long, long time.”

It’s unclear how far the FTC will go on both issues. But Biden’s newly confirmed chair – Lina Khan – has previously argued in favor of federal rules limiting the use of non-compete clauses. In a 2019 article in the University of Chicago Law Review, Khan wrote that the agreements often forced upon workers can “deter [them] from switching employers, weakening workers’ credible threat of exit, and diminishing their bargaining power.”

“By reducing the set of employment options available to workers, employers can suppress wages,” she continued.
California, North Dakota and Oklahoma already ban the non-compete agreements and Montana limits their use. In New Jersey Assembly Bill 1650 would reign in how and when employers could use the provisions. It was introduced in January 2020 but only advanced in one Assembly committee this February.

The bill would also make non-compete agreements unenforceable for employees who were laid off, and for seasonal and temporary employees, independent contractors, low-wage earners, anyone under 18 and anyone who’s been employed at a company for less than a year. Allowable non-compete agreements would be limited to one year, rather than the current two years. The primary sponsors for both the Senate and Assembly versions of the measure were not available for comment.
New Jersey courts tend to discourage non-compete provisions. But they are generally upheld as long as they protect an employer’s legitimate interests, impose no undue hardship on an employee and are in the public interest. “Legitimate restrictive covenants or non-competes with reasonable time and distance provisions with a legitimate business purpose, in my experience, are considered enforceable documents by the courts,” Berns said. But he contended that many competitive industries “should allow workers the unrestricted right to move among companies if they so choose.”

Frank Custode, a partner who chairs the employment practice at the law firm Curcio Mirzaian Sirot in Roseland, agreed, saying that any restrictions on non-compete agreements would be a victory for workers. “Many employees who have signed non-compete agreements are put in a very difficult position when they want to transition to the next phase of their career, and often find themselves in a legal dispute,” he said.

The EPI report found that nearly 30% of establishments paying less than $13 an hour enforced non-compete agreements. Industries such as retail, manufacturing and construction frequently use non-competes, the EPI found. A third of companies said they require staff to sign the non-compete agreement after they’ve accepted an offer, often on their first day on the job when they are “signing many forms and may not pay a great deal of attention to each form,” according to the report.

“Non-competes can and should be prohibited for the protection of our workers and the dynamism of the economy,” said Heidi Shierholz, EPI’s policy director. The federal government, she said, needs to “crack down on these agreements and restore key rights to workers.”