- The Federal Trade Commission (FTC) has announced a proposal that would ban noncompete clauses, which are contracts that can prohibit employees at a company from job jumping within their career field, trading company insights, and more.
- Without noncompetes, around one in five workers would gain the freedom to move freely within the job market.
- The FTC says outlawing noncompete clauses could boost wages by around $300 billion annually; many business leaders are concerned about the other vast potential implications of banning these clauses.
Coca-Cola’s secret formula might be at risk. At least that’s one of the worries if a recent Federal Trade Commission (FTC) proposal to ban noncompete clauses is approved.
Agreements like noncompete clauses are part of how information like that remains confidential. While the proposed ban would “generally not apply to other types of employment restrictions, like non-disclosure agreements,” intellectual property is just one of the many issues that is being discussed in relation to the news of a proposed ban of these clauses.
The future of work would look dramatically different without them, and business leaders are sounding the alarm that their removal would change everything from the protection of trade secrets to hiring practices, salary ranges, employee turnover, career trajectories, advertising practices, and more.
How and why noncompete clauses might be banned
The FTC announced earlier this month that it is seeking to ban noncompete clauses, a stipulation that prohibits employees at a company from job hopping within their industry or sharing company insights, and often much more.
Without noncompetes, around one in five workers would gain the freedom to move freely within the job market. For perspective, that’s 20% of the workforce, approximately 30 million American workers.
According to the agency, such clauses exacerbate inequalities in the workforce by limiting and exploiting opportunities for professionals.
“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC Chair Lina M. Khan. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.”
The FTC’s announcement says “the proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect.”
Outlawing noncompetes, the FTC says, could boost wages by around $300 billion annually.
The proposed rule is in the first step of the agency’s rulemaking process and is currently open to public comment through March 10.
Meanwhile, business leaders are concerned about the potential implications of banning these clauses.
Prohibiting noncompete clauses would rock the future of work
If passed, employees could be served with another astounding win in the ongoing battle with employers over workplace rights. However, it could also initiate major problems for companies in the future.
Here are four likely outcomes of banning noncompete agreements that could reshape the world of work in the coming years.
1. Employee Exodus
One of the biggest employer perks of a noncompete clause is being able to retain their top talent.
Employees under these clauses are typically restricted from taking jobs with competing companies or companies within the same industry for a set period of time — often many years — and from opening their own competing business, sometimes with a distance restriction added.
These agreements apply even if the cause of the job change is something so innocuous as moving to another area of a city and wanting a shorter commute.
This stops workers from joining companies that potentially offer better pay and benefits. As FranchiseWire puts it, “once [employees] gain expertise as they perform their duties, they aren’t able to take those marketable skills elsewhere for a lengthy period. Few people will want — or be able — to start over in another field, nor can most afford to be idle until the noncompete agreement expires and they can move into a job with better wages and possibly more move-up potential.”
This stifled mobility is where the FTC’s estimated $300 billion wage boost comes into play. By barring companies from implementing such policies, workers would be able to seek greener pastures as they please.
Research from the Economic Policy Institute shows 49.4% of organizations require some employees to enter a noncompete agreement, meaning banning these policies could give many workers the freedom to choose where to work without fear of repercussions.
Some noncompete clauses can also ban the hiring of former coworkers by employees who have left. Removing that restriction could allow former employees to begin hiring others into their new company, creating a cascade of departures and potentially gutting a single portion of a company.
2. Increased Competition for Talent
Because of a likely employee exodus, companies could also find themselves thrown deeper into the pits of the battle for top talent.
It’s no secret that the fight to retain employees has become tough in recent years thanks to the reignited fight for workers’ rights. Taking into consideration the independence that would follow a noncompete clause ban, hiring managers will need to do much more to keep their talent from being poached.
During an era in which many industries are turning to job cuts as a recessionary precaution, companies may face an even tighter battle to retain their layoff survivors, who may be tempted to jump ship due to depleting motivation and morale.
The fight to keep and attract top candidates would also lead to higher salaries, and thus increased payroll costs.
3. Loss of Intellectual Property and Proprietary Information
One of the biggest arguments in favor of noncompete agreements is the threat of losing intellectual property and other private company information.
Noncompetes generally protect companies from revealing their trade secrets, therefore protecting them from rivals within their industry.
Companies have a commitment to keeping their information private and secure, so the intention of these agreements is valid. However, the reality is that most of these clauses impact lower-paid workers, from yoga studios to sandwich chains, barring them from progressing in their careers.
“The biggest issue, in many ways, has less to do with the noncompetes themselves and more to do with how indiscriminately they’re used and worded, which in many cases, prevents workers from getting better jobs,” Albert Fong, a vice president of product marketing, wrote on LinkedIn.
“While some may argue that noncompetes are necessary, the biggest issue is they’re increasingly being used on low-wage earners with no access to trade secrets,” he said.
Several companies with low-wage workers have been subject to lawsuits over their use of noncompete clauses, including Jersey Mike’s and Jimmy John’s.
4. Spike in Entrepreneurism
The loss of intellectual property is certainly a possibility with the ban of noncompete clauses; some workers may choose to flee their employer to start their own company once the clauses expire.
Professionals who were previously kept from testing out their entrepreneurial skills would suddenly have the newfound drive and ability.
Whether the idea is to improve upon existing business models they learned at a former employer or starting a totally unrelated business, prohibiting noncompetes and opening the door for new business creation could accelerate economic competition at an unprecedented rate.
“Noncompetes reduce entrepreneurship and start-up formation, stagnating ambition, growth, creativity and innovation among the workforce,” said Marco Zappacosta, CEO and cofounder of Thumbtack, which eliminated noncompetes in 2020.
How Leaders Can Prepare
The banning of noncompete agreements serves as a win for employees, but leaders shouldn’t fret.
Much can be gained from a sweeping ban like this, although it will take adjusting current policies to mitigate potential losses for companies that currently use a noncompete clause.
Up the Ante
As mentioned, prohibiting noncompetes may lead to another Great Resignation as workers have the freedom to find jobs that provide better opportunities.
Perhaps the best way to prevent a mass exodus is to review current benefits packages and reconsider their impact.
If a rival company pays five dollars more an hour for the same role, there is little reason for an employee to stay on at their current employer.
But leaders can suppress the threat of employee turnover by giving workers what they desire from their jobs, typically in the form of better wages and benefits such as health insurance and paid time off.
Look to Existing Laws
For starters, companies can implement some other form of protection in the form of reviewing existing laws that may provide security. In fact, states such as California have already banned nearly all forms of noncompetes and are able to continue keeping their company secrets secure with policies such as the Defend Trade Secrets Act (DTSA).
The DTSA allows “[a]n owner of a trade secret that is misappropriated [to] bring a civil action… if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”
This gives companies the power to take legal action if any trade secrets are revealed to rivals, still giving leaders the upper hand in what they argue is the worst-case scenario of banning noncompete clauses.
Zappacosta also adds that NDAs (non-disclosure agreements) are a much “more effective, and less restrictive, approach to” keeping proprietary information from being transferred.
“Noncompetes impact every level of the economy, with working-class employees bearing the brunt of the pain — especially those who live outside big cities with healthy job markets,” he said. “In small towns, these agreements can severely limit or totally eliminate people’s ability to pursue other job opportunities.”
“A real conversation about how to empower workers at every level is long overdue, and eliminating noncompetes nationwide is a good place to start,” added Zappacosta.