Antitrust Law Daily Obama Administration presses for noncompete reform, antitrust collusion-busting
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Thursday, October 27, 2016

Obama Administration presses for noncompete reform, antitrust collusion-busting

By Pamela Wolf, J.D.

President Obama announced that he has taken action to address wage collusion, unnecessary noncompete agreements, and other anticompetitive practices in support of his April 15, 2016, Executive Order calling for actions that enhance competition to benefit consumers, workers, and entrepreneurs. The White House outlined its efforts in a fact sheet released on October 25.

To ensure that workers share more fully in the gains they help create, the White House announced these new steps:

  • Release of a new issue brief by the Council of Economic Advisers that reviews evidence suggesting that firms may have wage-setting power in a broad range of areas—so-called "monopsony power." The brief explains how anticompetitive forces can lead to a redistribution of revenues from workers to companies and reviews the policy implications of this analysis.
  • call-to-action to the states that includes a set of best practices for state policymakers to enact reforms to reduce the prevalence of noncompete agreements that are hurting workers and regional economies. To contextualize these best practices, the White House has released a state-by-state report on key dimensions of current state noncompete policy. The Obama Administration also committed to what it called "the largest data collection of its kind" aimed at better measuring noncompete usage by both firms and individuals. The White House and Treasury reported earlier this year that there is substantial evidence of overuse and misuse of noncompete clauses.
  • Guidance released on October 20, 2016, (by the DOJ and FTC) for HR professionals on how to spot and report collusion among competing employers that may violate the antitrust laws. In the guidance, the DOJ announced that going forward it will criminally investigate allegations that employers have agreed among themselves on employee compensation or not to solicit or hire one another’s employees.

Focus on noncompete agreements. The White House is clearly focusing on noncompete agreements as an area where it can make some headway. One in five U.S. workers is bound by a noncompete agreement, including 14 percent of workers making less than $40,000 per year, according to a survey referenced by the administration. "A considerable proportion of noncompete agreements signed by both low- and high-wage workers come at the expense of wage growth, entrepreneurship, and broader economic growth," the fact sheet states. "Researchers have found that states that strictly enforce noncompete agreements have 10 percent lower average wages for middle-aged workers than states that do not."

Beyond encouraging states to take action on noncompetes, the Obama Administration is also pressing Congress to pass federal legislation to eliminate noncompetes for workers under a certain salary threshold. The White House cited the Mobility and Opportunity for Vulnerable Employees Act (MOVE Act), originally sponsored by Senators Al Franken and Chris Murphy, and the Limiting the Ability to Demand Detrimental Employment Restrictions Act (LADDER Act) (sponsored by Representative Joseph Crowley).

Both bills were introduced by Democratic lawmakers in June 2015 but failed to make it out of committee. The MOVE Act would ban the use of noncompete agreements for employees making less than $15 an hour, $31,200 per year, or the minimum wage in the employee’s municipality. The LADDER Act would bar employers from entering into noncompete covenants with low-wage employees, defined as those making less than the greater of $15 an hour or the state or local minimum wage. Both bills would require employers to post a notice of the ban in the workplace and to notify prospective non-low-wage employees prior to hiring that they may be required to sign a noncompete agreement.

Best practices for state noncompete reform. The White noted that elected officials in Connecticut, Hawaii, Illinois, New York, and Utah have already signed on to support a call-to-action for state noncompete reform. In order to reduce misuse of noncompete agreements in states that choose to enforce them, the White House has asked state policymakers to join in pursuing best-practice policy objectives, including one or more of the following:

  • Ban noncompete clauses for categories of workers, such as workers under a certain wage threshold; workers in certain occupations that promote public health and safety; workers who are unlikely to possess trade secrets; or those who may suffer undue adverse impacts from noncompetes, such as workers laid-off or terminated without cause.
  • Improve transparency and fairness of noncompete agreements by, for example, disallowing noncompetes unless they are proposed before a job offer or significant promotion has been accepted (because an applicant who has accepted an offer and declined other positions may have less bargaining power); providing consideration over and above continued employment for workers who sign noncompete agreements; or encouraging employers to better inform workers about the law in their state and the existence of noncompetes in contracts and how they work.
  • Incentivize employers to write enforceable contracts and encourage the elimination of unenforceable provisions by, for example, promoting the use of the "red pencil doctrine," which renders contracts with unenforceable provisions void in their entirety.

Across the country businesses are eliminating noncompete agreements in favor of more targeted options, according to the White House. These businesses support a shift in noncompete policy because they recognize that fewer, more targeted noncompete agreements will likely result in a larger pool of available talent and improve innovation.

Collusion in the employment arena. On the collusion to suppress wages and limit worker mobility front, the White House explained that increased market concentration of firms can also facilitate collusive agreements that permit a small number of employers that compete over the same workforce to artificially suppress wages below market rates or agree not to hire one another’s employees. "Like price-fixing in product markets, collusion among employers to reduce wages is illegal in the U.S. and subject to anti-trust laws," the fact sheet warns.

In 2014, eight Silicon Valley employers settled a civil class action suit for $415 million for allegedly colluding to suppress the wages of programmers and engineers. There was evidence of "no-poaching" arrangements, in which the firms agreed not to engage in competitive recruiting of each other’s workforces. Other suits have alleged collusive behavior among hospitals to suppress the wages of nurses. In Detroit, for example, eight hospitals reached settlements that amounted to about $90 million in total for alleged collusion to lower wages below market rates.

In addition to the new guidance issued by the Justice Department and FTC to combat collusive behavior in the employment arena, Acting Assistant Attorney General Renata Hesse recently highlighted existing Justice Department policy declaring "a merger that gives a company the power to depress wages or salaries to reduce the prices it pays for inputs is illegal whether or not it also gives that company the power to increase prices downstream."

And it’s worth saying one more time, as announced in the new guidance, that going forward the Justice Department will criminally investigate allegations that employers have agreed among themselves on employee compensation or not to solicit or hire one another’s employees.

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