Restrictive Covenants Are Bad for People and the Economy

FTC Estimates Noncompetes Cost Americans $300 Billion a Year

What happens when a mom-and-pop gets bought out by a multinational conglomerate? Spoiler alert: mom-and-pop employees often lose big time.

Let's take my friend "Derick" as an example. Derick started hanging insulation when he was 14 in his family business. He then spent more than 40 years in insulation sales until a prominent national firm purchased the small company he worked for.

To stay employed, he had to sign a one-sided employment contract featuring a set of restrictive covenants. When they let him go in 2023, the big company's lawyers started sending threatening letters reminding him that he couldn't work in his field for two years unless he moved 100 miles away -- essentially running him out of town like the old West.

According to the FTC, Derick is not alone. Nearly 18% of American workers are bound by these covenants that cost employees as much as $300 billion a year. It can be argued that this is why the trickle never really makes it down. And that's why the FTC is examining a proposed rule to ban noncompete clauses altogether.

In Derick's case, the sweeping terms of the contract he was coerced into signing would prevent him from working for a competitor or any company that served "their customers" for two years, making him unable to work for or be in contact with his 40-year+ professional network. This includes nearly every home builder, residential architect, and the hundreds of homeowners he's worked with in Maine before the acquisition. He wouldn't be able even to get a job at a big box home improvement store. And they meant it, too.

When a company representative saw him talking to a friend of 25 years who is also in construction, their lawyers sent him a threatening letter. They also sent customers and business owners copies of these letters. Can you imagine the emotional and professional harm this causes?

They even took his 1986 Rolodex and old business cards he kept as momentos before he could clear out his office.

If this sounds unfair, it's because it is. Many have said, "Oh, that can't be enforceable," but finding out will cost Derick, at 60, his retirement savings and maybe even his home. He had hoped that Maine's Governor Mills would follow Minnesota and New York's example and help get these clauses banned before the FTC's pending 2024 ruling. Sadly, it seems as though she's waiting for the FTC's order to stay politically neutral.

The good news is that the FTC is not only working on restricting or banning noncompetes; it is also partnering with the Dept of Labor to protect workers from anticompetitive, unfair, and deceptive practices. According to the press release:

The FTC has also prioritized cracking down on anticompetitive contract terms that put workers at a disadvantage.

This may not help Derick in time, but it hopefully will help millions of Americans whose opportunities and careers have been thwarted by unfair contracts. Please add your thoughts here and share.

Please sound off below and let me know what you think about restrictive covenants.