The following article was originally published in the Ohio Capital Journal and published on News5Cleveland.com under a content-sharing agreement.
A bipartisan pair of Ohio lawmakers want to ban noncompete contracts as a condition of employment in the state. In response to the proliferation of those post-employment contracts, federal regulators attempted to prohibit them nationwide last April — an effort which was blocked by the courts.
The Ohio bill’s sponsors point to the same examples of employer overreach and make the same arguments about stymied innovation that the Federal Trade Commission had made.
The FTC regulation
Business leaders contend noncompete agreements are necessary to protect their intellectual property, client relationships, and investments in employee training. The FTC argued that there are other mechanisms available to protect trade secrets and other investments. The commission noted that California, North Dakota, and Oklahoma don’t seem to have a problem and none of them allow noncompete contracts.
The FTC argued further that those post-employment restrictions affect 1 in 5 workers and represent a drag on workers’ earnings of $250-$300 billion a year.
The regulation was met with immediate resistance from business interests, and in August last year, a federal judge put the regulation on hold.
With a new presidential administration in place, the Federal Trade Commission might drop its appeal of that injunction. An outside group called Small Business Majority attempted to intervene in the case to keep fighting, but last week the court rejected their effort.
Only the smells are free
Ohio Senate Bill 11, sponsored by state Sens. Louis Blessing, R-Colerain Township, and Bill DeMora, D-Columbus, covers the waterfront. The measure prohibits agreeing to, attempting to agree to, presenting, or enforcing a noncompete contract. That applies to agreements based on industry, geographic area, or period of time.
Sponsors include a handful of carveouts for employees with individual legal representation — think executives or professional athletes — as well provisions to ensure it doesn’t conflict with programs that pay off student loans in exchange for working some period of time.
The legislation also creates a civil action for employees who claim their employer violated the prohibitions.
“It is the epitome of a free market bill,” Blessing argued.
He dismissed arguments that noncompete contracts hurt businesses as a “misnomer.” Blessing said businesses understandably look for ways to keep costs down, and noncompetes have become a tool for putting a ceiling on wages.
“Noncompetes serve as a way to reduce wages through reduction of labor mobility, because you’re unlikely to go try to find another job for more wages,” he explained. “But more importantly, if you really believe in a vibrant free market, it also cuts down on business formation.”
“You know, I can see it for like, a high-level sales executive or something like that,” he added, “but these have proliferated down the level of employees at Jimmy John’s.”
DeMora picked up on the same example of sandwich shop employees forced to sign noncompete agreements.
“It’s not somebody that invented a computer chip,” he said.
“The average Joe working as a bartender,” DeMora went on, “I mean, I’m sorry, a Manhattan has been around for 200 years. I don’t know how it’s a trade secret if you make a good Manhattan to take your trade somewhere else.”
He called it “ludicrous” to allow those agreements to remain in place, artificially holding down wages for ordinary workers.
“We all know the job market, there are enough people to fill all the jobs,” DeMora said. “And so, if someone wants to pay more money, and a worker, working two jobs as it is, wants to go make more money doing the same thing, they should be allowed to do that.”
Muted reactions
Although the U.S. Chamber of Commerce forcefully denounced the FTC’s noncompete regulation as “unlawful” and “a blatant power grab,” the Ohio Chamber of Commerce stayed mum.
Reached this week, an Ohio Chamber spokeswoman noted, “while we’ve been monitoring Senate Bill 11, the Ohio Chamber has not taken an official position on this legislation.”
Similarly, the free-market think tank The Buckeye Institute declined to take a position on the bill but pointed to its written comments objecting to the FTC rule. Notably, its critiques centered on an argument that the FTC’s actions exceeded its authority. And while the Buckeye Institute defended the use of noncompete agreements, they primarily framed their argument around lack of harm. The fact that three states ban noncompete contracts, they argued, means 47 states believe they’re a good idea.
“These policies have weighed the rights of the employers and employees and the need to protect confidential information, proprietary training, and employers’ trade secrets,” the group wrote. “Noncompete agreements can also result in higher wages — or even severance payments — for those signing them.”
That example of severance payments relates to a steel company executive who signed a one-year noncompete contract granting him severance in the event of termination — not exactly the sort of option on the table for most wage workers.
Other business groups like the Ohio Manufacturers Association praised the court ruling that blocked the FTC noncompete rule, but the group didn’t respond to Ohio Capital Journal’s request for comment about state legislation. The Ohio Business Roundtable declined to comment.
