It sounds like a classic case of corporations taking advantage of workers — provisions attached to a contract that prevent that worker from switching to work for competitors. That’s certainly how they’re viewed by Federal Trade Commission (FTC) Chair Lina Khan, an antitrust crusader whose bull-in-a-china-shop attitude towards reform has tended to hurt consumers more than help them. But the reality is, as usual, more complicated than Khan perceives it to be.
The FTC recently announced that it is proposing a rule to ban new non-compete clauses in contracts, and prevent companies from enforcing existing ones. Under this rule, nearly all non-compete agreements would be deemed illegal, with only a limited exception for agreements between a buyer and seller of a business.
Non-compete agreements are, at their core, a response to a problem. That problem is that many workers require a substantial investment in time and training before they actually return some value to the company training them. This makes training and investing in a new employee extremely risky to businesses, as they could spend time, effort, and money training an employee who then immediately jumps ship once they have acquired marketable skills.
In this sense, non-compete agreements can be beneficial to workers because they make it more beneficial to train and invest in new employees by giving the company security that their investment will pay off. Incentive structures that encourage businesses to invest in workers are generally a good thing.
This is why FTC-touted studies claiming that banning non-compete agreements would raise wages by $300 billion should be taken with a grain of salt. Businesses would not just stand by as their newly trained employees leverage their months of training to earn a higher salary from a competitor — in the absence of non-compete agreements, businesses would be far less willing to work to provide employees with those marketable skills in the first place. The result would quite likely be that established employees would earn higher salaries, but new opportunities would be reduced as businesses become leery of investing in new employees.
There’s also other cases where non-compete agreements are logical. Companies entrusting employees with sensitive trade secrets or proprietary information of course do not want those employees running to their competitors with it. That information would undoubtedly be valuable to those competitors, but it doesn’t mean that businesses protecting themselves is a bad thing.
None of this is to say that non-compete agreements are always good for employees and innovation. Some non-compete agreements are undoubtedly structured to unfairly limit employees’ bargaining power and restrict their options. But neither is it the case that there are no guardrails on non-compete agreements as it stands — civil jurisprudence has already created precedents against clearly abusive practices.
But an intelligent response to non-compete agreements requires a scalpel, not Khan’s preferred chainsaw. It is possible to restrict predatory business practices while simultaneously recognizing the problem that non-compete agreements were developed to solve, and that it is good for workers and the economy broadly for companies to have an incentive to train and invest in new employees.
Too often, Khan’s FTC has missed the broader picture in favor of a myopic focus on things arbitrarily deemed “bad.” This has been the theme of Khan’s antitrust policy, targeting “big” companies for their size rather than any demonstrable negative impact on consumers.
This approach fails to recognize that heavy-handed change to address perceived problems can easily create very real ones. While there may be room for reform to how non-compete agreements function now, poorly-considered reform like this would likely prove more damaging to Americans than none at all.
