The FTC wants to ban non-compete contracts, U.S. Rep. Jim Jordan wants to block that effort
Non-compete contracts place limits on the kind of work a person can do once they leave a job. Sometimes that takes the form of a geographic limit — like a 15-mile radius or a series of counties. Other times it might involve specific competitors or lines of business.
The intent is to ensure an employee who leaves a company can’t carry off that company’s business with them. But the practice can be devastating for workers looking for their next job.
The Federal Trade Commission took steps in January to effectively eliminate non-compete contracts.
To the layperson they likely evoke white-collar, c-suite level jobs. Nike understandably might not want their COO to become the next CEO at Reebok. But the agreements have become increasingly common in industries you likely wouldn’t expect.
A cosmetologist in Michigan saw a new gig in Ohio as a way to improve her family’s circumstances and even set aside money for her youngest. Her salon presented a non-compete months after she’d uprooted her family and moved to the Toledo area. She left for a different salon 20 minutes up the freeway, but had to quit because it still fell within a 15-mile radius.
A sales rep in Wisconsin took a job with an Ohio-based plumbing supply company. Despite a favorable mid-year review, the company fired her after less than a year. She’s still unemployed because the non-compete carries a year-long, global ban on working for more than 20 companies they consider competitors.
A dermatologist got a job with a hospital system in Cleveland. She loved the job but not the hospital setting. Her non-compete agreement was extensive enough that she and her husband decided to move out of state. She now practices in Florida.
The FTC rule
The Federal Trade Commission contends these agreements amount to “unfair methods of competition” under the Federal Trade Commission Act. The agency’s proposed rule would bar employers from imposing such agreements on their workers or independent contractors. It would also rescind any existing agreements and direct to employers to inform their workers of the change.
The FTC contends 1 in 5 American workers — roughly 30 million people — are subject to a non-compete agreement. The agency argues these contracts reduce wages by curtailing the flow of workers between employers and stifling the creation of new businesses.
Among the FTC’s arguments for eliminating non-competes, it suggests workers’ earnings would increase by $250-$290 billion annually, consumer health care costs would decline roughly $148 billion a year, and the number of companies started by former employees in a given industry would double.
Helen Brosnan, who heads up the organization Fight Corporate Monopolies, supports the plan wholeheartedly. She argued small businesses should be able to compete for workers, and workers should be able to move freely. Both sides of the equation should “have their own full suite of economic freedoms,” she said, “and non-competes get in the way of that.”
Brosnan added there are already laws on the books protecting intellectual property and trade secrets — a common argument for maintaining non-competes. She pointed to California, Oklahoma, and North Dakota, three states where employers can’t enforce the contracts.
“It’s not like it’s now shuttered business in a place like California,” Brosnan argued. “We’ve seen industries that depend on things like trade secrets, or other kinds of key, high-level information like that have been able to still continue and flourish.”
Congressional Republicans’ response
The FTC’s position borrows from a familiar formula long popular among conservatives: increase growth by reducing barriers in the marketplace.
But instead, some of the most conservative lawmakers in Congress, including Ohio Republican U.S. Rep. Jim Jordan, are calling it an unlawful “power grab.”
In a letter to FTC commissioners, Jordan and Reps. Thomas Massie, R-KY, Darrell Issa, R-CA, and Scott Fitzgerald, R-WI., argue the agency’s proposal exceeds its authority. They also insist it is sweeping enough to require explicit congressional authorization under the major questions doctrine.
“The proposed regulation is a chilling example of the Biden FTC’s radical belief that it has the power to regulate wide swaths of the economy based on a subjective view of its “unfair methods of competition” authority,” they wrote.
As for the proposal’s impact on workers, the lawmakers argue the FTC itself concedes “the rule could lead to less employee training, less investment, and fewer new jobs.”
The FTC’s filing does acknowledge some employers are more willing to invest in training or materials when they know an employee can’t easily leave, but the agency called the potential impact on new jobs inconclusive.
The lawmakers add that the FTC’s plan would undermine the rule of law by invalidating “voluntary agreements.” In reality, the contracts are often presented as a condition of employment.
Oddly enough, Jordan, Issa, and Massie all co-sponsored a national ‘right-to-work’ bill during the last congress. That legislation would prohibit requiring union membership as a condition of employment.
To Brosnan, the letter puts lie to Republican claims that they’re the party of the working class.
“If Republicans want to be the party of lower wages, bad working conditions, and increased hurdles to starting a new business in your community,” she said, “let them have at it.”
Before Cindy Holbrook moved to Toledo, she’d already been working as a licensed cosmetologist for 23 years. At the time, she was dating someone in the area. She’s also a competition bodybuilder and had coaches in town.
Holbrook started looking around the area and found a highly regarded salon in Perrysburg called Soto. In talking with the owners, she was told some stylists were clearing $75,000 a year working 21 hours a week. What’s more, Holbrook is an extensions specialist, and that was something they could really use.
“They’re like, we need people that do these — we turn people away, left and right,” Holbrook said. “So, I mean, I was like, wow, this is going to be like the golden ticket to my career.”
She sold her home in Michigan and moved with three kids to Toledo. About 90 days into her tenure at Soto, the manager explained she needed to sign a non-compete contract. Holbrook said they offered to give her to look it over with an attorney but insisted “this is what we require for people to work here.” The agreement came with a $100 bonus.
With few local connections, and having just uprooted her family, Holbrook didn’t feel she really had choice. She signed the contract.
The agreement prohibits workers from taking a job providing cosmetology services anywhere within 15 radial miles of Soto. To put that in context, 15 miles north of Soto is about two miles into Michigan.
Applying the same radius to the Ohio Statehouse would eliminate any gig within Columbus city limits. Suburbs as far out as Dublin, Powell, Westerville, New Albany, Canal Winchester, and Grove City would also be largely off the table.
A few months later, the windfall Holbrook expected hadn’t materialized. She noted in passing that the salon raised prices during the same stretch without an increase in commissions. So Holbrook decided to find another job, and picked a salon in Sylvania, just south of the Michigan state line.
Both Perrysburg and Sylvania are Toledo suburbs — the former to the southwest and the latter to the northwest. Holbrook’s new job was a roughly 14-mile drive, but 11 straight-line miles away.
“I thought, you know what? who’s going to split hair over a mile, right?” Holbrook said. “They did.”
Not long after she started, Holbrook got a cease-and-desist letter in the mail. She had to leave that new job and explained she hasn’t been able to find something consistent since. Her youngest daughter is in grade school and commuting beyond the salon’s non-compete radius would put Holbrook too far for comfort in an emergency.
It’s particularly frustrating for her because she tried so hard to be cautious and plan ahead. Holbrook commuted for the first few months to make sure Soto would be a good fit. Her plan was to rent for a year and then use the proceeds from her home sale in Michigan to make a big down payment. Hopefully, she explained, there’d be enough to set aside money for her youngest daughter, to “give her something to stand on.”
Instead, Holbrook now picks up shifts every other week at her former salon in Michigan when she takes her daughter up to stay with her dad. Otherwise, she’s burning through savings. She recently applied for public assistance to get help with groceries and rent. She signed up for Medicaid, too.
“To have a non-compete for the average middle-class worker is essentially causing extreme financial hardship on an individual that cannot choose,” she said. “I have, easily, within a half-mile of where I live, five to 10 hair salons that I could just go and pick up where I left off, you know?”
“And I can’t.”
In an email, Soto co-owner Jessica Johnson defended the practice, noting many high-end salons make similar demands and they’re very common in the industry.
Johnson said they maintain confidentiality regarding individual employee information, so she declined to comment on Holbrook’s tenure. However, she said the agreements are permitted, “even after an employee has begun employment,” so long as the time and geographic limits are reasonable.
She argued the agreements protect their investments in a worker’s education and development. Johnson said Soto provides training, mentoring, and continuing education “at no charge.”
She also cited their marketing efforts to develop employees’ clientele. But often the non-compete sends former employees far enough away that they ostensibly couldn’t take advantage of those investments anyway.
“Each employee and applicant should always carefully review proposed non-compete agreements to determine whether they are acceptable,” Johnson concluded. “If not, they should seek other employment before signing.”
Johnson didn’t address Holbrook’s contention that her work in Sylvania didn’t materially impact Soto’s business.
And while Johnson made arguments about the cost of training and continuing education, Holbrook had more than 20 years of experience before she walked in the door. With that level of experience, Holbrook contends, she didn’t receive training or proprietary information from her time at Soto.
Even if the salon’s investments in Holbrook’s career deserve an accounting, the cost of the non-compete to Holbrook is a year’s salary.
Sarah Eischen lives in Wisconsin, but she used to work as an account manager for Oatey, a plumbing manufacturer in Cleveland. When she came to the company, Eischen already had 15 years of experience in plumbing sales. The non-compete agreement Oatey required her to sign is sweeping.
She faces a global ban on working for 20+ companies listed on the agreement. But even that list isn’t all-inclusive. Should Eischen find work with any company in the plumbing field, she would still need to get Oatey’s permission to take the job.
It rankles Eischen that Oatey presented the agreement in a packet of long, complicated forms that she had to sign remotely without any explanation or discussion. She had visited in-person not long before to fill out other paperwork.
“Shame on me that I didn’t really look at everything that I was signing,” Eischen said. “But in no way, shape, or form did anybody put this document in front of me and say, ‘and this is the noncompete, should our employment ever cease, this is what’s going to happen.’”
Eischen worked at Oatey for 10 months. “I did a mid-year review, things were great,” she explained, “And then three weeks after that I was let go with no reason.”
Oatey still insisted on enforcing the non-compete contract, she said.
Eischen is actually somewhat sympathetic to Oatey’s concerns, even if she believes they’re misplaced. During her exit, she tried to negotiate a handful of companies off the list. She explained the line of business where Oatey has trade secrets is in cement and primers for PVC fittings.
When she offered her proposal, Eischen said, “I left any other pipe sealants companies on there, because obviously, that could be a concern. Just because maybe I was exposed to formulas, even though I have no idea what those are.”
Oatey argued back, she said, that she knows their pricing information, but Eischen dismissed that argument.
“I had 8,000 products that I was responsible for, and I went through five price increases,” she said. “I don’t even know all the different categories that I sold into, let alone understand what the price of ballpoint valve was.”
Still, Oatey didn’t budge, Eischen said.
Although Eischen lives in another state, lawyers have warned her she is still bound by the Ohio contract. Because the agreement’s provisions are “global” she doesn’t even have the ability to pick up stakes and try to find similar work elsewhere.
She estimated there are maybe a dozen companies in the field that aren’t on Oatey’s list — but that was purely a guess. Asked how many employers she certain of who aren’t on the list, the total dwindles.
“Plumbing companies?” she said. “One. And honestly that one was my employer prior to Oatey.”
Representatives from Oatey did not respond to a request for comment.
Ohio Capital Journal also spoke to a dermatologist who asked not to be identified because of concerns about employment retaliation.
She began practicing in California in 2018 but accepted a job a few years ago in Cleveland.
“There was a huge demand for dermatology in Cleveland,” she said. “A lot of patients have to wait, close to six to 12 months to see a doctor.”
She loved her job but wanted to transition to a smaller practice instead of working in a hospital setting. But her non-compete came with a 20-mile radius, making a simple change of scenery all but impossible.
As she described it, the system wound up being bad for everyone involved.
“There was a lot of turnover in the area,” she said. “People would often only stay for a year or two and then leave — and like, kind of leave the area.”
“There was a lot of turnover with the patients as well,” she continued. “(They) would kind of start to get established with a doctor, and then basically (they) would have to find another doctor.”
She said it was sharp contrast with the work environment in California. Without the leverage of a non-compete, employers had to work to attract new employees and to keep existing staffers. She explained that translates to more generous workplace policies.
In Cleveland, meanwhile, employers know workers have limited options. They can stay where they are, get an internal promotion or move far enough away that they’re no longer their employer’s problem.
In the end, she and her husband wound up moving to Florida. Her current practice has a non-compete as well but it’s far less onerous — just two miles from the practice. Like Eischen, she’s actually sympathetic to the underlying idea.
“I would never want to leave somewhere and try to take patients,” she explained. “Even in California, there are some restrictions where you don’t solicit the patients that you’re working with, and you don’t take employees from the practice, and I understand that. I think that’s reasonable.”
She explained nearly every contract she sees in the medical field comes with some sort of non-compete clause. She further estimated 50-60% of them cover geographic areas that could balloon to hundreds of miles, especially for hospital systems with satellite locations dotting the region.
Although her non-compete isn’t too bad, her husband’s is. He works in the medical field as well and he’s looking for a new opportunity where he’ll be a bit busier.
Because of that non-compete clause, they’re now, once again, preparing to move to a different state.
Jordan and his fellow congressmen can’t do much on their own to halt the FTC’s rule. Blocking a rule requires both the House and Senate to pass a resolution of disapproval and for the president to sign it. With Republicans controlling the House while Democrats hold the Senate and the White House, that’s unlikely to happen.
Still it’s far from smooth sailing for the FTC.
Business groups like the U.S. Chamber of Commerce are already threatening a lawsuit. That court battle could overturn the rule itself or tie it in knots until the next presidential administration. Because the FTC’s proposal is a regulation rather than a law, a president who took a different view of the matter could overturn it with the stroke of a pen. The chamber has also floated the possibility of tying the agency’s hands through a budget rider.
The agency will be accepting public comment on the proposal through April 19. Already the FTC has gotten nearly 10,000.
This story was republished from the Ohio Capital Journal under a Creative Commons license.