ARTICLE
10 May 2024

The Federal Trade Commission's Final Ruling To Ban Non-Compete Clauses And Turkish Stance On Non-Compete Clauses

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Inal Law Office

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Led by Şeyma İnal, İnal Law Office combines in-depth knowledge of Turkish law with an international outlook. Experienced members of our team assist local and multinational clients in Commercial, M&A, Shipping, Banking and Finance, Corporate, Energy, Transportation, Construction, Competition, Employment, Litigation and Arbitration fields under the requirements of business frameworks.
In recent years, labour markets have come under intense scrutiny by competition authorities due to emerging competition concerns around the world.
Turkey Employment and HR

In recent years, labour markets have come under intense scrutiny by competition authorities due to emerging competition concerns around the world. In particular, competition authorities have focused on agreements between competitors that may lead to a restriction of competition, such as wage-fixing agreements or no-poaching. As the relationship between competition law and the labour market is developing, the competition authorities significantly influence one another in terms of their different approaches and enforcement actions.

On April 5, 2024, the US Federal Trade Commission ("FTC") announced its final rule to ban non-compete clauses, except the existing non-compete clauses for senior executives, which will become effective 120 days after its publication in the Federal Register.1

Under the final rule it is indicated that non-compete clauses in agreements between employees and employers will be considered as “an unfair method of competition” and therefore a violation.2 It is noteworthy that non-compete clauses in employment agreements is entirely prohibited under antitrust laws in the US. This rule should be considered ground-breaking for the assessment of non-compete clauses globally since this issue has not been discussed as widely as in the context of competition law before. The mentioned rule will be outlined hereinbelow, and then the Turkish stance on this issue will be presented.

Outline and Background of the Proposed Rulemaking

In the final rule, the non-compete clause is defined as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition” and the concept of “term or condition of employment” is accepted as a contractual term or workplace policy, whether written or oral.3

The proposed rulemaking is outlined as follows:

  • Entering into, attempting to enter into, enforcing, attempting to enforce a non-compete clause with a worker and/or representing that the worker is subject to a non-compete clause is an unfair method of competition.
  • If an employer has entered into a non-compete clause with a worker prior to the compliance date must rescind the non-compete clause no later than the compliance date.4
  • In case of a non-compete clause entered into by a person pursuant to a bona fide sale of a business entity, this final rule does not apply.

FTC adopts a different approach for senior executives who earn more than $151,164, and who are in a “policy-making position” as defined in the final rule5. Under this exception, existing non-compete clauses with senior executives can remain in force based on raising credible concerns and practical impacts. Even though the final rule accepts an exception for existing non-compete clauses with senior executives, in case the non-compete clause is entered into after the effective date, then entering into, attempting to enter into maintaining a non-compete clause and/or representing that the senior executive is subject to a non-compete clause is also banned.

FTC has several incentives for the ban which are mainly based on negative impacts on workers and competition, and preventing unfair methods of competition is at the core of the FTC's mandate. Such negative impacts emerged (i) by preventing workers across the labour force from pursuing better opportunities that offer higher pay or better working conditions and (ii) by preventing employers from hiring qualified workers bound by these contracts.

Before the proposition phase of the ban, researchers made a comprehensive analysis of the non-compete clauses' impacts. The outputs of this research show that the non-compete clauses, (i) significantly reduce workers' wages, (ii) stifle new businesses and new ideas, and (iii) can exploit workers and hinder economic liberty. In addition to the elimination of mentioned negative impacts, FTC estimates that the proposed rule could (i) increase workers' earnings across industries and job levels by $250 billion to $296 billion per year and (ii) close racial and gender wage gaps by 3.6-9.1 per cent.

The FTC, expects as a result of the final rule that new business formation will be growing by 2.7% per year, more than 8,500 additional new businesses will be created each year, the earnings for workers will be higher, the earnings for the average worker will be increase by an additional $524 per year and the health care costs will be lower up to $194 billion over the next decade, the patents each year will be increased by 17,000 to 29,000 for the next 10 years and thus the innovation will be driven, when it is considered that an estimated total of 30 million workers—nearly one in five Americans—are subject to non-compete clauses.

Finally, as of now, the FTC is already facing several lawsuits regarding the final rule on banning non-compete clauses. For instance, the US Chamber of Commerce has decided to challenge the final rule alleging that the FTC didn't have the power to issue a ban. Under normal circumstances, the final rule will become a law 120 days after it is published, however these lawsuits can lead to delay in the effective date.

Turkish Stance on the Competition Law Violations in the Labour Market

Lately, the Turkish Competition Authority ("TCA") is one of the competition authorities that continuously intervene in agreements between competitors in the labour market and has a hard-line approach. In recent years, the TCA has launched several investigations in the field of the labour market.

In April 2022, the TCA's first decision to impose a fine in the labour market was published6. At the end of the investigation, the TCA imposed fines totalling to TRY 58 million on the grounds that the investigated parties, which are private health institutions and associations related to them, had (i) jointly fixed the operating room service fees, (ii) restricted competition by preventing transfers of workers and jointly fixed staff salary, and (iii) exchanged competitively sensitive information. This decision is crucial as the TCA concluded that the employee wage-fixing and no-poaching agreements were not different than cartel behaviour, and that such practices restrict competition per se. The TCA emphasised that there is no fundamental difference between (i) no-poach and customer/market sharing agreements, and (ii) wage fixing and price fixing agreements.

It is also wort noting that, in August 2023, the TCA concluded its broadest investigation7, which was initially launched against 32 companies, and which had been expanded to 49 later, and decided to impose administrative fines on 16 undertakings based on the violation of the Article 4 of the Law No. 4054 on the Protection of Competition (“Law No. 4054”) which was defined as “cartel”. The parties to the investigation included the leading companies in the e-commerce, food, communications, media and retail sectors. During the investigation, the TCA rejected the commitment requests on the grounds that no-poaching in the labour market is a serious offence. The mentioned investigation process was concluded with settlement for 11 undertakings.

Moreover, earlier this year, the TCA concluded one of its broadest labour market investigations8, which was launched against 7 software and IT companies and had expanded to 20, and imposed administrative fines on 8 undertakings based on the determination that they had violated the Article 4 of the Law No. 4054. The reasoned decisions that will be published are likely to shed light on the framework of the competition law violations in labour markets.

With regard to the non-compete clauses in the employment contracts, the TCA's approach is broadening recently. In 2011, the TCA had assessed non-compete clauses in employment contracts in one of its earliest decisions, the Henkel Kimya decision9. In the Henkel Kimya decision, the TCA concluded that non-compete clauses do not fall within the scope of competition law, as these clauses do not apply between undertakings, but are a part of the relationship between an undertaking (employers) and its employees. On 15 February 2023, the TCA published another reasoned decision, Transorient Decision10, which includes an assessment regarding a non-compete clause in an employment contract. In this case, the TCA confirmed that employment contracts and the non-compete clauses should be evaluated under the Turkish Law of Obligations. However, the TCA still conducted a competition law analysis due to the non-compete clause assuring that certain customers could work with the former employee when its employment contract ends.

This demonstrates that the TCA has expanded its approach and, even though it was established that employment contracts and non-compete clauses fall under the Turkish Law of Obligations, it still scrutinises such practices within the scope of the competition law. Apart from the detailed assessment in the Transorient Decision, it mainly shows that in specific matters, the TCA tends to evaluate the employment contracts within the scope of the competition law.

In summary, the recent cases demonstrate that the TCA is taking a hard line on violations of competition law in the labour market. The evolution of the TCA's approach in light of the expected reasoned decisions and new cases will be important for the undertakings to fully understand the framework of assessing competition law violations in the labour market.

Conclusion

The FTC's approach and the newly announced final rule on banning non-compete clauses may influence the positioning of competition authorities worldwide, including the TCA, on non-compete clauses in employment agreements in the future. By the adoption of the final rule, the FTC will unconditionally restrict non-compete clauses in employment contracts under the competition law. This approach may be ground-breaking in terms of the relationship between competition law and labour law. The FTC's final rule shows that competition concerns in the labour market can also arise from the relationship between an employer and an employee who is not considered as an undertaking. This recent development raises a number of issues as non-compete agreements are implemented unilaterally, one of which is the concern over whether such an intervention will level the playing field between the employees and the employers.

In recent years, the TCA's approach has entailed further intervention. The assessment that non-compete clauses may be anti-competitive, brought forward by the FTC, may influence the TCA to also adopt a similar approach in the future as well as the other competition authorities all over the world. Accordingly, the TCA's ongoing cases as well as any new case that may be initiated in the labour market will need to be closely watched in terms of the full scope and framework of the Turkish stance.

Footnotes

1. See: https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes

2. FTC, Non-Compete Clause Rule, p. 2.

3. FTC, Non-Compete Clause Rule, p.4

4. FTC, Non-Compete Rule, p. 212

5. FTC, Non-Compete Rule, p. 255.

6. TCA's Decision dated 24.02.2022 and numbered 22-10/152-62

7. Please see: https://www.rekabet.gov.tr/tr/Guncel/isgucu-piyasasina-yonelik-centilmenlik-a-eabd47edff30ee118ec500505685da39

8. Please see: https://www.rekabet.gov.tr/tr/Guncel/isgucu-piyasasina-yonelik-centilmenlik-a-9bc1911c89dbee1193c80050568585c9

9. TCA's Decision dated 26.05.2011 and numbered 11-32/650-201.

10. TCA's Decision dated 26.05.2022 and numbered 22-24/390-161.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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