Chicken Little, the Sky Isn't Falling: Why the FTC Ruling Doesn't Mean Panic

The latest from the FTC is in: non-competes are out in the United States... and the internet is freaking out. It's reminiscent of Chicken Little screeching about the sky falling. There are several implications for employers, but just like in the story (or the movie, depending on your age), everything is going to be okay. The FTC's ruling against non-competes included an impressive amount of regulatory changes that are worth taking the time to understand. Here's a breakdown of the ruling, and what it really means for employers:

What are Non-Competes and Why Are They Problematic?

These are agreements which restrict a worker's ability to work for, or start a business, that competes with their former employer for a certain period of time within a defined geography. They were created to help employers protect the business interests, trade secrets and client relationships they entrusted to their employees during the course of employment. While there's logic in not wanting to invest in developing an employee for them to turn around and go somewhere else and potentially lose business, non-competes have no real upside for workers.

All of the benefit is on the side of the employer and non-competes are arguably signed under extreme duress, as the jobs the non-compete are associated with are generally only available if the non-compete is signed. And therein lies the first problem. Thanks to the non-compete, the unbalanced power dynamic reaches far beyond even the life of employment. It's been shown workers with non-competes generally have less job security and are exposed to exploitative employment practices. It's also restrictive to career mobility, limiting workers' ability to find new employment in the field they work in the area they already live. They are problematic for workers for a host of other reasons too, including:

• Reduces Bargaining Power: by reducing worker flexibility through limiting the job market, workers have less leverage to negotiate salaries and benefits.

• Restricts Career Growth: by limiting access to new opportunities, professional development is slowed down as is exposure to innovation.

• Reduces Wages / Earning Potential: the restriction of mobility leads to lower wages. This negatively impacts earning potential over the lifespan of workers' entire careers.

• Can Inhibit Entrepreneurship: Non-competes prevents workers from starting their own businesses in a field related to their experience. This isn't just bad for workers and their families, it stifles the growth of entire industries.

Given these concerns, the FTC has proposed a nationwide ban on non-competes. The ruling is intended to promote competition and foster a more equitable labor market, ultimately benefiting the economy. (TL;DR? Non-Competes are historically beneficial for employers, but bad news for workers. )

Understanding the FTC's Stance and Scope

The FTC's proposed ban on non-competes is designed to increase competition, promote industry growth, and protect workers' rights. The ruling applies to most employees, regardless of position or industry. Employers are required to rescind existing non-competes and inform employees that these agreements are no longer enforceable.

However, there are exceptions. Non-disclosure agreements (NDAs) and non-solicitation clauses in employment agreements remain valid. Similarly, agreements related to the sale of a business, where the seller is a significant owner and agrees not to compete, are still enforceable.

Despite lawsuits already filed challenging the FTC's authority to impose this ruling, the core argument for the ban is non-competes stifle competition and suppress worker wages, which is detrimental to overall the U.S. economy. That does seem firmly in the FTC's purview, so the outcome of these lawsuits will be interesting to follow.

Significant Implications and Benefits for Employers

While the proposed ban might seem daunting to some employers, the sky is not falling. Increased talent mobility may lead to greater competition for talent and potentially higher turnover rates, but this also offers opportunities:

• Strengthening Confidentiality Protections: The FTC notes over 95% of workers with a non-compete already have a non-disclosure agreement and, again, non-solicitation clauses in employment agreements are still valid. Employers should review their NDAs and non-solicitation clauses to ensure they adequately protect sensitive information. Consulting with legal advisors or external firms to ensure compliance is recommended.

• Adapting Recruitment and Retention Strategies: With increased competition for talent, employers must focus on creating a strong employee value proposition (EVP) that is built around person-environment alignment, as that is foundational to driving retention (and revenue). Offering competitive salaries and communicating strong career development opportunities, and ways your organization provides life balance will be crucial to attract and retain talent.

• Fostering Innovation: The FTC expects the ruling to stimulate industry growth and create new jobs. This presents a positive opportunity for startups and smaller businesses to hire new talent and for established companies to innovate.

Large employers will still be able to flex the power of their benefits and small employers are likely to find it easier to access talent once practically blocked from moving to them. The ruling can be a catalyst for positive change, encouraging employers to focus on building a more attractive and supportive workplace. Employers quick to embrace these changes will not only get a head start on compliance with the new regulations, they're also poised to gain a strong competitive edge in the evolving job market.

Conclusion

The FTC's ruling against non-competes could drive innovation and stimulate job creation, leading to industry growth. Tony Tong, a professor of strategy and entrepreneurship at the Leeds School of Business, suggests this change will make it easier for startups and smaller businesses to attract talent, as employees have more flexibility to move between companies. His research, which supports this idea, was even cited by the FTC in its ruling.

FTC Chair Lina Khan revealed in a statement that the commission expects this ruling to create 8,500 new startups in the U.S., a projection that's received positive reactions from venture capital firms. This shows that the ruling's impact goes beyond individual workers—it could significantly boost entrepreneurship and drive economic growth.

While it's easy to focus on the negatives and see the sky as falling, the FTC's ruling against non-competes should be viewed as an opportunity. By adapting to the new landscape and creating a more supportive work environment, employers can foster innovation and attract top talent. It may require some adjustments, but the end result will benefit everyone involved.