Written by Jeremy Ben Merkelson, Gerald Stein, Christopher Im and Jandee Wallis from Davis Wright Tremaine LLP on December 11, 2024
Action against a New York staffing agency is part of the FTC’s larger effort against employment non-compete clauses and restrictive covenants
The Federal Trade Commission (FTC), in a 3-2 party-line vote last week, ordered a New York City area building services contractor, Guardian Service Industries, Inc. (Guardian), to rescind all “no-hire” agreements, including employee non-solicitation clauses, in its customer contracts with the residential, commercial, and government buildings, schools, and industrial facilities to which it supplies workers. Though the FTC’s enforcement action only covers Guardian, this decision to go after a relatively routine no-hire clause between a staffing agency and its clients has broad implications for the staffing industry and the economy writ large and is part and parcel of the FTC’s larger effort in the Biden Administration to crack down on restrictive covenants that impede worker mobility, such as non-compete provisions. Staffing companies, employers that utilize temporary workforce staffing solutions, and other entities with no-poach or no-hire agreements should take note of this important development.
No-Hire Provisions
No-hire and no-poach agreements are contractual clauses that prevent one company from hiring the employees of another for the duration of the agreement and usually for a restricted window after the relationship ends. They are similar to but more stringent than employee non-solicitation clauses, in which one company agrees to refrain from actively recruiting another’s employees. Staffing agencies often use no-hire provisions to protect their investments and prevent exploitation by their clients. In the absence of a no-hire clause, a client could directly hire workers assigned by the agency—bypassing the recruitment process and depriving the agency of its commission or placement fee.
Not all no-hire provisions are legal. The Sherman Act prohibits so-called “naked” no-hire and non-solicitation agreements that exist only to stifle competition for employees. But no-hire and non-solicitation agreements that are ancillary to legitimate procompetitive collaborations have generally been acceptable where their procompetitive justifications outweigh any anticompetitive effects. For example, in Aya Healthcare Servs. v. AMN Healthcare, Inc., the 9th Circuit upheld a traveling nurse staffing agency’s non-solicitation provision as necessary to prevent partnering companies from raiding its employees.
The FTC’s Consent Order Against Guardian
Despite this precedent, the FTC recently investigated and determined that building staffing agency Guardian’s no-hire agreements were unlawful. Guardian provides doormen, security, janitors, and other staff to residential and commercial buildings on the East Coast, principally in New York and New Jersey. In return, the buildings agreed not to poach Guardian’s workers. Now, a proposed consent order from the FTC directs Guardian to revoke all such agreements.
Notably, the FTC found no evidence that Guardian’s no-hire provisions were ever enforced or had any anticompetitive effects. However, in a 3-2 party-line decision, Chair Lina M. Khan characterized all no-hire agreements as “restrict[ing] workers’ mobility” and “undermin[ing] fair competition in labor markets.”
The dissenters agreed the FTC should “protect employees from unlawful restraints of the labor markets” but argued that there was no such restraint here. Republican Commissioners Melissa Holyoak and Andrew N. Ferguson noted the lack of evidence of anticompetitive effects and suggested that the FTC should have considered whether the no-hire clause existed to protect Guardian’s investments in training and recruitment or to exploit workers.
What You Need To Know
The Guardian enforcement action is consistent with similar efforts by the FTC to protect workers’ rights through aggressive interpretation and expansion of federal competition law. Earlier this year, the FTC also attempted to implement a nationwide rule banning non-compete agreements, an action that was set aside by a federal district court in Texas. The Guardian case illustrates the FTC’s intent to increase scrutiny of employment-related restraints, even in the absence of anticompetitive effects. While no-poach agreements in staffing and consulting arrangements are typically permissible when narrowly tailored, the FTC’s growing attention to the issue underscores the need for employers to assess whether their practices might attract regulatory scrutiny.
The FTC’s action against Guardian does not carry the force of law beyond the specific parties involved. However, it reinforces the FTC’s broader message that certain employment practices, particularly those that limit worker mobility, will face heightened scrutiny.
What Comes Next
The FTC is accepting public comments on the proposed consent order until January 6, 2025. Employers who want to weigh in on this issue or clarify the implications for their business can and should weigh in. DWT can offer strategic advice and help craft thoughtful comments that reflect your organization’s perspective. Staffing agencies in particular might consider weighing in, given the business-altering impacts of the FTC’s interpretation of the circumstances.
Looking ahead, it is noteworthy that employee mobility is a bipartisan concern in Washington that creates some strange bedfellows. Although the two Republican commissioners dissented from this particular enforcement action, given different underlying facts we expect the FTC to continue focusing on the anti-competitive impacts of no-hire, non-compete, and other restrictive covenants even during the Trump administration. We encourage employers to proactively review their practices and policies to ensure compliance with current legal standards.
