Will Federal 'Noncompete' Ban Help Or Harm New Jersey Workers?

NEW JERSEY — It’s a scenario that an estimated one in five Americans will experience in their lifetime: signing a “noncompete” agreement. But this controversial hiring practice may soon go the way of the dodo for many U.S. employees under a new ruling from the Federal Trade Commission, although opinions are mixed on what it may mean for New Jersey.

On Tuesday, the Federal Trade Commission (FTC) issued a final ruling that bans noncompete agreements nationwide. An exception is made for existing deals with senior executives, who represent less than 1 percent of U.S. workers – but making new agreements is prohibited.

The stakes are high, according to federal officials: an estimated 30 million U.S. employees – nearly one in five Americans – are subject to a noncompete deal. And apart from adding an estimated 8,500 startup companies to the U.S. economy, a ban could put an extra $524 into the average worker’s wallet per year.

The announcement got a thumbs-up from President Joe Biden, who said “workers ought to have the right to choose who they want to work for.” It also got a thumbs-down from the U.S. Chamber of Commerce, which called it “a blatant power grab” that will hamstring businesses across the nation.

The final rule will become effective 120 days after publication in the Federal Register. However, it already faces a legal challenge from business groups, who have sued the FTC seeking to block the ruling.

What is the debate about? Here’s what workers are agreeing to when they sign a noncompete deal with a company, according to Investopedia:

“A non-compete agreement is a legal agreement or clause in a contract specifying that an employee must not enter into competition with an employer after the employment period is over. These agreements also prohibit the employee from revealing proprietary information or secrets to any other parties during or after employment.”

Supporters say that noncompete agreements are an important tool that helps companies protect their hard-earned corporate secrets. But critics argue that they keep wages low, suppress new ideas and prevent healthy competition on the job marketplace.

According to the FTC:

“Noncompetes often force workers to either stay in a job they want to leave or bear other significant harms and costs, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave the workforce altogether, or being forced to defend against expensive litigation.”

It isn’t just workers who pay the price, the FTC says. There is also evidence that noncompete agreements lead to “increased market concentration and higher prices for consumers.”

Pro-business advocates have argued for keeping noncompete agreements intact, claiming that a ban will limit the ability of employers to protect their legitimate business interests. They include opponents from New Jersey, who bashed the FTC’s proposed rule changes when they were announced last year.

“Noncompete agreements ensure that previous employees are not able to unfairly utilize resources and information they obtained from a previous employer to gain an undue advantage as they move on in their careers,” said Alexis Bailey, vice president of government affairs for the New Jersey Business and Industry Association.

“As a state that is home to many companies in the pharmaceutical, financial services and technology industries, these agreements are important to the economic vitality of the New Jersey economy,” Bailey said.

However, according to the FTC, employers have several alternatives to forcing noncompete agreements on their workers, including trade secret laws and non-disclosure agreements (NDA). Researchers estimate that over 95 percent of workers with a noncompete already have an NDA.

A better way to retain workers? Improve your wages and working conditions, the FTC suggested.

It’s a point that one expert echoed to NorthJersey.com after this week’s ruling. Many New Jersey employers will need to abandon their “restrictive covenants” and revisit how they retain talent, said Tom Muccifori, a partner at law firm Archer Greiner.

“It’s going to require some out-of-the-box thinking,” Muccifori said, adding that some measures might include looking at compensation packages and offering a better work-life balance.

Patch contacted the New Jersey Department of Labor seeking comment about the FTC rule changes. We will update this article with any reply we receive.

• See Related: Is NJ Ready For A 32 Hour Workweek? It Could Happen – Here’s How

NO POACH AGREEMENTS

A similar controversial hiring practice – “no-poach agreements” – has also come under fire on the federal level.

Last year, U.S. Sen. Cory Booker of New Jersey and his Senate colleague Elizabeth Warren of Massachusetts reintroduced a proposed law that would crack down on the “collusive” agreements, which are often used by large franchisors to prohibit franchisees from hiring each other’s workers.

“Businesses shouldn’t be allowed to collude to suppress workers’ wages,” Booker argued. “Corporations already employ a variety of anti-competitive practices and no-poach agreements, often kept hidden from employees, are particularly predatory and serve to keep wages down and limit job opportunities.”

“It’s time to ban these harmful agreements and protect the rights of all workers,” the senator said.

In 2018, Booker and Warren sent a letter to the CEOs of nearly 100 large companies, urging them to abandon their use of no-poach agreements. The list included several chains that operate in New Jersey, such as Applebee's, Arby’s, Baskin-Robbins, Burger King, Domino’s Pizza, Dunkin’ Donuts, Five Guys Burgers and Fries, IHOP, Jersey Mike’s, Jiffy Lube, Panera Bread, Papa John’s, Planet Fitness, The UPS Store and Wendy’s.

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