Federal Trade Commission seeks to ban (most) non-compete agreements

January 10, 2023/Business, Regulations/

The Federal Trade Commission (FTC) released a notice last week, that you can read here, that announced that they are contemplating banning almost all non-compete agreements that are not a part of an agreement between buying and selling companies. Since non-compete agreements have been a part of the employer/employee relationship in funeral homes this could have wide-ranging effect on death care employer/employee relationships.

In many professional businesses, such as funeral homes, the longevity of a professional employee can make a big difference to the bottom line of the business simply because the longer an employee has been with an employer the more business contacts he or she makes. These employees may also be knowledgeable about the business’s marketing operations which help it attract more and more business. Owners of these businesses recognize this fact and, many times, will ask the employee to sign an agreement that if they leave that specific employer they agree not to work in the same capacity in a given geographic area and for a specified period of time. That’s what is known as a “Non-Compete Agreement”.

Over time courts have ruled that these agreements have to be very specific, be in a limited geographic area, and the employee should be compensated for signing them in order to be valid. However, again over time, there has been a movement that has continually found them to be restraining to employees and, according to this article from The Hustle, the FTC has concluded that they restrict wages. . . According to the FTC, to the tune of $250 billion to $296 billion annually nationwide.

The FTC also alleges that about one in five United States employees is covered by a non-compete agreement, or approximately 30 million people, and because of such “. . .are restricted from pursuing better employment opportunities“.

As employees have been harder and harder to find in a tight labor market, the FTC alleges it is now not uncommon for security companies or even fast-food franchises to ask employees to sign non-compete agreements. Again, according to the article from The Hustle, the FTC now believes that non-competes have gone too far. . . now including employees who have not built up clientele or possess trade secret knowledge from a certain company. The thought is that some non-compete agreements now exist simply to tie an employee to a firm in a very tight labor market.

It should be noted that this proposed action by the Federal Trade Commission would not include non-compete agreements established through the sale of a business such as a funeral home that prohibits a former owner from establishing a competing firm from the one he or she sold. Those type of non-compete agreements are very common and very necessary in a professional business acquisition. For instance, without that type of agreement a seller of a funeral home could virtually re-establish the funeral home he sold next door to the one he sold. It would certainly lessen the value of any sale and make a potential buyer be very cautious about a purchase.

However, from my point of view and from what I’ve read, a ban on all other non-competes as being suggested by the FTC would not allow funeral home owners the ability to restrict their current employees from working at a competing firm upon their leaving employment. It would certainly give more leverage to employees in this situation.

According to an article in the Wall Street Journal (you may be restricted via a pay wall) this action will not move forward without a fight from America’s employers. The WSJ article states, “. . . (this is) a proposal that would allow workers to take jobs with rival companies or start competing businesses but raises the prospect of legal opposition from companies that say the practice has a legitimate purpose”.

Funeral Director Daily take: This may be an interesting battle going forward as the Wall Street Journal describes. I understand the idea of a ban on non-competes at a franchised restaurant, but you may get another opinion from an owner of one of those restaurants. I’ve heard from more than one owner that since the pandemic returning workers have been hard to find and the wage base for these workers has went up. . sometimes dramatically. Owners have complained that as soon as they get a worker trained in they are poached by another restaurant offering a higher wage. . . making keeping employees difficult.

I also had breakfast on Sunday with a friend of mine who is a former CEO of a large agricultural-based company. I was telling him of this potential article and he mentioned to me that his firm paid for “advanced educational opportunities” for its employees. Many times, he pointed out, employees received their MBA paid for by his firm and then announced they were leaving for a new job opportunity. His point, without some type of employment agreement in place, his company paid for and educated his future competitors. . .

So, as the Wall Street Journal points out, non-competes are not a simple issue to deal with. . .the realities of business can make their use quite nuanced and sometime necessary.

Related — Here is a recent article from Yahoo Finance entitled “Minimum wage rises in more than half of U.S. states.”

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