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The Federal Trade Commission is on track to ban non-compete agreements. Considering how these contracts have been used to prevent hairdressers and cashiers from finding better jobs, you might think it’s about time.
Non-competes stop employees from moving to rival businesses, and their proliferation among everyday working folks has become a scandal. But banning them for every employee across the country, including those with access to pivotal proprietary information that could seriously harm a current employer, is certain to create new problems.
For a smart compromise, look no further than Illinois. The state’s policy on non-competes is a model that would work better for the nation than the FTC’s proposed blanket ban. We don’t get to say it very often, but Illinois is ahead of the pack on this one.
The “Illinois Compromise,” as it’s known, came about in 2021, a few years after then-Attorney General Lisa Madigan brought a well-deserved enforcement action against Check Into Cash, a payday lender with stores in Illinois.
The Tennessee-based company required all employees, including those making less than $13 an hour, to sign highly restrictive non-competes before starting their jobs. If they left the company, those modestly compensated employees were forbidden for a full year from working at any other business involved in consumer lending or transmitting money.
The contracts were written so broadly they covered everything from auto dealerships to Western Union and even the U.S. Postal Service. They also covered a vast geography, barring former employees from working anywhere within 15 miles of the chain’s hundreds of locations across more than two-dozen states.
Check Into Cash was an especially abusive example of a practice that has hurt a vulnerable part of the workforce. Because of the contracts, companies can practically own their workers, who would then face greatly diminished prospects if they decide to leave. The FTC has rightly identified these one-sided deals involving low-paid workers as anti-competitive restraints on trade that suppress job mobility and wages.
In Illinois, the Check Into Cash case inspired legislation that was surprisingly fair-minded. Rather than ban non-competes, as worker advocates initially wanted, Illinois lawmakers balanced the concerns of employers as well as employees to specifically protect workers earning $75,000 a year or less.
For those earning more, the Illinois law allows non-competes to be enforced only if the employees get paid something for having signed them, and only if employers have legitimate business interests needing protection. Those are vague standards, for sure, but happily they allow for flexibility that’s missing in the FTC proposal.
For some businesses, there’s no good substitute for these contracts. Consider the head trader at a hedge fund, or the lead software engineer at a tech startup, or other key employees who could move to a competitor and use their knowledge to harm their previous employers.
The FTC would still allow confidentiality agreements and contracts forbidding the disclosure of trade secrets (as does the Illinois law). But those alone aren’t enough to protect against insiders aware of every trading position or line of code from crossing the street and giving an unfair advantage to their new companies.
In some cases, getting rid of non-competes would set up business owners and investors to be cheated out of what rightly belongs to them, hurting innovative entrepreneurs and discouraging innovation and competition in the long run.
So far, that prospect has not deterred the FTC and its current chair, progressive hero Lina Khan. The GOP and business groups such as the U.S. Chamber of Commerce maintain her agency lacks the authority to override the law on non-competes in Illinois and other states – at least not without approval from a GOP-controlled Congress unlikely to give it.
Christine Wilson, who was the only Republican on the commission, spent months publicly attacking the agency’s efforts to check corporate power. She resigned March 31 because of what she described as Khan’s “defiance of legal precedence and her abuse of power to achieve desired outcomes.”
In March, Khan’s agency extended the public comment period for its proposed rule by a month, until April 19, signaling not that Khan has changed her mind, but that comments keep pouring in. The stakes are high for this one.
If a state as blue as Illinois can come up with a bipartisan compromise on this issue – the General Assembly approved the measure unanimously – then even an agency as far to the left as the current FTC can do the same.
Drop the proposal for a total ban and work out a deal that protects the prospects of rank-and-file employees but also respects the interests of companies that want to compete for business without the risk of a turncoat insider hijacking their secret sauce.
Chicago Tribune