On April 23, 2024 local time, the U.S. Federal Trade Commission (FTC) announced a blanket ban on all employees from signing new non-compete agreements. For existing non-compete agreements, senior management will remain in force, while non-compete agreements for other employees will no longer be enforced after the stated effective date. The ban is still in the public announcement stage and will be officially implemented in four months.
A non-compete is a contract between an employer and an employee, which usually stipulates that the employee shall not engage in competitive conduct in the same industry for a specified period of time after the termination of the employment contract, so as to protect the rights and interests of the former employer. In the past two years, the use of non-compete agreements in the mainland Internet industry has become more and more extensive, and many grassroots employees and outsourced employees have been involved, and there have even been cases of "a monthly salary of 8,000 yuan but nearly 1 million liquidated damages" have been reported by the media, causing many controversies.
Non-compete agreements have a history of more than 100 years in the United States, so why did the FTC suddenly decide to ban them altogether, and what are the considerations behind this?
The origin and proliferation of non-compete agreements
Amy, a Chinese in the United States, is a financial analyst at a private equity fund, and she recalls that when she first received the company's offer email last year, she saw the non-compete agreement attached to the email, and she was not surprised at the time, "We are all used to it, and we feel that there is no right not to sign, and if we don't sign, we won't let you come." Amy explained that for financial practitioners in the United States, there are usually non-compete restrictions on core positions related to trading.
Non-compete agreements in high-income industries are often accompanied by generous compensation, which is not so difficult to accept. Amy said that the cooperation of her peers with non-compete restrictions is generally high, and she rarely hears of labor disputes, mainly because "the agreement can be negotiated, not so rigid, and if the position is not too sensitive, you can negotiate with the company to shorten it to half a year or a few months." The money was also given. Amy changed jobs after working for a year and a half, and her non-compete period was only 3 months, during which the company still paid her a basic salary according to the standard of one million annual salary, "I am equivalent to being hired by this company, but I don't need to work, and I can also travel, which is very cool." ”
Stills from "The Queen Wears Prada".
But not everyone is as fortunate as Amy — non-compete agreements are widely used in the United States, with a 2019 analysis by the Economic Policy Institute (EPI) finding that nearly half of all companies in the U.S. have employees in non-compete status, and according to the Labor Department in June 2020, about 18% of Americans are bound by non-compete agreements, including many low- and middle-income blue-collar industries, such as technology, hairstyling, and dance direction.
Even the sandwich line-making workers can't escape — in 2016, American sandwich chain Jimmy John's used a non-compete agreement with its low-wage workers, requiring them to ban all dine-in employees and takeaway employees from working in a two-mile neighborhood of a two-mile "sandwich store" for two years after they left the company. In some sparsely populated and underdeveloped commercial towns, non-compete agreements discourage employees from leaving their jobs and are forced to accept low wages from Jimmy John's, and once they leave, it is difficult to find a job again, and they fall into poverty and unemployment. The case has raised widespread eyebrows, with the Illinois Attorney General finding that the non-compete agreement restricts employee mobility too much and exceeds the scope of legitimate business interests and should not be enforced.
Non-compete agreements in the United States originated in the 15th century in the English craft system. According to the Harvard Law Review, the first case of non-compete violation in England was the Dyer's Case in 1414. At a time when the bubonic plague had caused a sharp reduction in the supply of labour in Europe, and the Labour Act made it illegal not to work in the UK, the judge was not very sympathetic to the employer's request. The plaintiff demanded that his former apprentice (a garment dyer) be barred from opening a shop in the same town, and the judge threatened the plaintiff with jail if he dared to prohibit others from working.
A still from "The New Madame Bovary".
Ke Zhenxing, a lecturer at Nankai University Law School, has long been engaged in the field of labor law in the United States, and he explained that most of the handicraft industries in Europe at that time were apprenticeships, and in order to avoid the apprentices from stealing the master's customers after they matured, a non-compete agreement was born - prohibiting apprentices from opening stores in the area near the master's business, "The original intention of the non-compete agreement was to prevent this kind of unfair and immoral competition, and to avoid the situation of 'teaching apprentices and starving masters'." ”
Initially, non-compete agreements were commonly used in jobs such as tailors, bakeries, and dentists, but with the rise of industrialization in Europe and the United States, factories frequently used non-compete agreements among employees in order to avoid having their formulas stolen. Ke Zhenxing introduced that suing employees for stealing trade secrets requires high proof, and it is difficult for enterprises to recover losses, while the evidence of non-compete agreements is relatively simple, so enterprises widely use the latter to protect their own rights and interests. On the other hand, more and more salespeople have mastered the core customer resources of enterprises, and in order to avoid customer relationships being taken away by employees, many enterprises will adopt non-compete restrictions. "For these purposes, non-compete agreements are becoming more and more proliferating in the U.S. across a wide range of industries."
In the U.S., non-compete agreements are controversial
The Federal Trade Commission (FTC) announced a blanket ban on all employees from entering into new non-compete agreements, followed restrictions on non-compete agreements in several U.S. states. The most typical is California. Section 16600 of the California Business and Professions Code states, "Subject to a few exceptions, a contract is void if it restricts any person from engaging in any type of lawful occupation, trade, or business." Other states have set a "revenue red line" for non-compete agreements to take effect: In Oregon, employees earning less than $100533 a year are not allowed to enter into a non-compete agreement. In Washington state, employees must earn at least $116593 to be subject to a non-compete agreement. An implicit assumption behind this is that low-income employees are less likely to have their hands on a company's core secrets or resources.
Stills from "We Who Can't Be Beasts".
In order to prevent employees from being "suddenly attacked" when they join the company, some states in the United States have also established strict signing rules. Oregon, Massachusetts, and Illinois, for example, all require businesses to set aside two weeks or more for employees to consider non-compete clauses.
The debate over non-compete in the United States has been going on for decades, with the scales shaking over the rights of employers on one side and the labor rights of ordinary workers on the other. However, this time, the FTC proposed a "comprehensive ban on non-compete agreements" on the grounds of "public interest".
The Federal Trade Commission (FTC) was established in 1914 as one of the antitrust economic measures introduced by President Woodrow Wilson of the United States to promote competition and eliminate monopolistic business practices.
The FTC estimates that non-compete clauses will increase the rate of new business formation by 2.7%, adding 8,500 new businesses each year; In the first year of the anti-compete agreement, about 3,000 to 5,000 new patents are expected to be added; In addition, employee salaries will increase by $400-$488 billion over the next decade, and the average annual income of employees will increase by an additional $524.
Stills from "Billions".
There is no shortage of empirical studies on this type. According to research by MIT management professor Matt Marx, when employees are unable to move to better jobs through reasonable competition, their motivation to work will be greatly affected, which will affect the productivity of enterprises and even regions. In addition, employees who are afraid of non-compete litigation will be inclined to join large companies for protection, thus preventing startups from attracting professional talent, making the market environment skewed in favor of large companies, which can harm the overall economy of the region.
In fact, the impact of non-compete agreements on innovation and development was evident as early as the 18th century. More than two hundred years ago, if Samuel Slater, the founder of the American textile industry, had not come to the United States with knowledge of the Arkwright spinning machine, in violation of Britain's 'non-compete agreement' that prohibited skilled craftsmen from leaving the country, the Industrial Revolution in the United States might have been delayed. Matt Marx wrote.
Besides, do employers really need a non-compete agreement? Isn't a non-disclosure agreement a substitute for it? There may also be a question mark on this. After Washington State enacted an income red line for non-compete agreements in 2020, a survey of Washington labor law lawyers found that only 10% of corporate clients would raise wages to workers slightly below the threshold at or above the threshold in 2022. When asked why workers were not given a pay rise to enforce a non-compete agreement, the lawyer replied that employers do not need to enforce non-compete restrictions on these workers, and that there are other legal tools such as non-solicitation agreements and commercial confidentiality agreements.
Stills from "The Office".
Since the 2014 case of the iconic sandwich chain Jimmy John's, the Democratic Party has added a number of restrictions on non-compete agreements in its dominant states, and Congress has proposed them many times during his administration, but they have not passed. In 2016, the Obama administration also released two reports demonstrating widespread abuse of non-competes.
"Traditionally, the issue of non-compete agreements has been the responsibility of the Department of Labor, but this time Biden asked the FTC to raise it." He argues that if this action is to be understood, it is necessary to understand that an important thrust of Bidennomics: "Promote competition, help small businesses, and empower American workers." Since Biden took office, the FTC has repeatedly blocked giant acquisitions, such as Meta's acquisition of Within Unlimited, Microsoft's acquisition of Activision Blizzard, and Exsenck's acquisition of Vanguard Natural Resources.
Stills from "Seven Meetings".
Immediately after the ban was enacted, it was challenged by many large corporations. The U.S. Chamber of Commerce has filed a lawsuit on the grounds that the FTC is ultra vires. According to media reports, the FTC received nearly 27,000 letters commenting on the proposal, with the strongest opposition coming from Wall Street. The Securities Industry and Financial Markets Association (SIFMA), a trade group of the securities industry, wrote in a comment letter that "a blanket suspension of non-compete agreements will harm competition and economic operations." "SIFMA's board of directors is made up of executives from major financial companies such as JPMorgan Chase, Morgan Stanley, Bank of America, Citigroup, and others.
At present, the bill is still in the public announcement stage, and it will take four months to see whether the FTC can "liberate" American workers from the non-compete agreement this time.