By Liam Sherer
As the global economy grows and becomes more competitive, businesses are implementing policies to protect themselves and create an edge over competitors. However, such policies may come at the expense of workers. One example of this is demonstrated through the current debate over noncompete agreements.
Function of Noncompete Agreements
Noncompete agreements have become a standard measure for employers to protect their businesses. Surveys have estimated between 18% and 45% of workers in the private sector may be subject to them.[1]These agreements are often found in employment contracts and restrict or prohibit employees from obtaining competitive employment after their current employment terminates, generally within a certain geographic area and for a limited time period.[2]
Controversy over Noncompete Agreements
In New York, the state Legislature’s concerns about low to middle-wage workers being unfairly burdened by noncompetes have clashed with the interests of large business organizations lobbying to allow such agreements to protect their trade secrets and prevent solicitation of clients by competitors.
On June 20, 2023, the New York State Senate and Assembly passed Bill A1278B/S3100A, which, if signed by Governor Hochul, would prohibit employers from seeking, requiring, demanding, or accepting noncompete agreements from employees and other worker classifications.[3]
On December 22, 2023, Hochul vetoed the bill amidst pressure from Wall Street lobbyists representing powerful financial services companies such as JPMorgan Chase & Co. and Goldman Sachs. Such employers argue that they rely on noncompete agreements to prevent high-level employees like executives from taking intellectual property and clients to competitors.[4]
Hochul and the Legislature should balance these interests with the need to protect workers in lower-wage tiers from unreasonable burdens associated with restrictions from obtaining employment with competitors. Noncompetes can prevent such workers from seeking higher wages and trap them in unfair working conditions.[5] For instance, one study found that a nationwide ban on noncompetes would increase average wages by 3.3%-13.9%.[6]
Negotiations between Hochul and the Legislature over a reasonable wage threshold for the ban failed. Hochul pushed to ban noncompetes for workers earning under $250,000 per year, while legislators insisted on a higher line between $300,000 and $500,000. Additionally, disagreements arose over the effect of bonuses and stock options, both of which are large components of many Wall Street executives’ salaries.[7]
Looking forward
If an agreement is reached and a new bill is passed next year, New York State will join a group of states restricting noncompete agreements, including North Dakota, California, Oklahoma, and Minnesota.[8]
Meanwhile, the Federal Trade Commission (FTC) is expected to vote on a proposed rule this upcoming April that would ban noncompete agreements nationwide. This would be a huge win for workers, as the FTC projects such a ban would boost wages by nearly $300 billion per year, leaving employers scratching their heads for ways to promote retention. However, some industry groups, led by the U.S. Chamber of Commerce, argue that the FTC lacks proper statutory authority to impose the ban and threaten to sue if the proposed regulation is issued in its current form.[9]
[1] Luis Ferré-Sadurní, Hochul Vetoes Bar on Noncompete Agreements in New York, The New York Times (Dec. 22, 2023), https://www.nytimes.com/2023/12/22/nyregion/kathy-hochul-veto-noncompete.html.
[2] Noam Scheiber, U.S. Moves to Bar Noncompete Agreements in Labor Contracts, The New York Times (Jan. 5, 2023), https://www.nytimes.com/2023/01/05/business/economy/ftc-noncompete.html.
[3] Assembly Bill A1278B, The New York State Senate (Jan. 13, 2023), https://www.nysenate.gov/legislation/bills/2023/A1278/amendment/B
[4] Luis Ferré-Sadurní, Hochul Vetoes Ban on Noncompete Agreements in New York, The New York Times (Dec. 22, 2023), https://www.nytimes.com/2023/12/22/nyregion/kathy-hochul-veto-noncompete.html.
[5] FTC Cracks Down on Companies That Impose Harmful Noncompete Restrictions on Thousands of Workers, Federal Trade Commission (Jan. 4, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-cracks-down-companies-impose-harmful-noncompete-restrictions-thousands-workers.
[6] Matthew S. Johnson, Kurt Lavetti, & Michael Lipsitz, The Labor Market Effects of Legal Restrictions on Worker Mobility (Sep. 18, 2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3455381.
[7] Luis Ferré-Sadurní, Hochul Vetoes Ban on Noncompete Agreements in New York, The New York Times (Dec. 22, 2023), https://www.nytimes.com/2023/12/22/nyregion/kathy-hochul-veto-noncompete.html.
[8] Douglas T. Schwarz, Daniel A. Kadish, Jonathan M. Weinberg, New York State Legislature Passes Prohibition on Employer Noncompete Agreements, Morgan Lewis (June 21, 2023), https://www.morganlewis.com/pubs/2023/06/new-york-state-legislature-passes-prohibition-on-employer-noncompete-agreements.
[9] Dan Papscun, FTC Expected to Vote in 2024 on Rule to Ban Noncompete Clauses, Bloomberg Law (May 10, 2023, 4:32 PM), https://news.bloomberglaw.com/antitrust/ftc-expected-to-vote-in-2024-on-rule-to-ban-noncompete-clauses.
