Will Noncompete Clauses Become a Thing of the Past in the U.S.?

The U.S. Federal Trade Commission (FTC) has proposed a rule banning “exploitative” noncompete clauses.? News of this proposal is shaking up the work world. One in five workers are affected by these clauses, with the intent of restricting employees from working for rival companies or starting a competing business. But will noncompete clauses truly become a thing of the past? It could take months to see a formal decision, so let’s explore the pros and cons of noncompetes.?

By Mariah Flores

The U.S. Federal Trade Commission (FTC) recently proposed a rule to ban noncompete clauses, which they call “exploitative” — a move that already has bipartisan support.?

If signed into regulation, a ban of this magnitude/scale would allow employees to work for their employer’s competition — or become the competition themselves — without the risk of being sued.

“The clauses have spread to affect one in five workers [approximately 30 million people], including low-wage earners with no access to trade secrets and other strategic information — reasons often cited for restricting job switchers,” reports LinkedIn News editor Cate Chapman. The FTC argues that noncompetes suppress wages and hinder new businesses from being formed. The agency estimates the ban would also increase workers’ earnings by nearly $300 billion every year.

Some experts, like Kwame Christian, Esq., M.A, predict that a noncompete ban will affect negotiations, shifting power dynamics. Others contend that if non-compete clauses do become a thing of the past, companies will struggle to build and protect things like USPs (unique selling propositions).?

“Without any version of protection, how are trademarks going to be affected? How can any company truly be ‘different’ from another?” asks Melanie Asher, MBA.?

Only a few states currently have noncompete agreement bans (California, North Dakota, and Oklahoma), with others limiting their use for low-wage or non-exempt workers. But such restrictions can get tricky.

“Multistate employers must also be concerned about the enforceability of their restrictive covenants across state lines. One critical distinction in how states view noncompete agreements is whether a state court is willing to revise what it considers to be an overbroad covenant,” writes SHRM.

There are various discussions taking place about this matter before the rule even takes effect, which could be months away.?

Charlie Saffro, president and founder of CS Recruiting, is another member who’s taking part in the conversation. I spoke with her to learn more about the impact of noncompete clauses and how you, as a worker, can best navigate them in the meantime.

How Do Noncompete Clauses Work?

Noncompete agreement language varies from employer to employer.?

Yet the clauses’ purpose is still the same, per Saffro: “[T]o prevent any employee from leaving a company and having any involvement (as an employee, owner, consultant, etc.) with a rival.”?

The FTC formally defines a noncompete clause as a “contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends.”

And noncompetes don’t only pertain to those working in top-security positions.?

In the past, these agreements have applied to a variety of workers, from security guards and sandwich makers to corporate executives and doctors. It’s important to beware of how such agreements could affect your future ability to seek employment or build a business in direct competition with your current (or former) employer — even in low-wage positions.

Need to work a second job to make ends meet? Interested in applying for an intriguing job opening at a rival company? A noncompete could hinder those possibilities.

“Most non-compete clauses will detail what specific companies or types of companies are considered competition to provide some guidelines, but this clause is often ‘gray’ when it comes to determining which companies are in or out of bounds,” says Saffro.

Additionally, she notes that noncompetes may be included as part of employment agreements or separately as a “noncompete agreement.” These documents are often distributed to new hires “when they join a company and [are] mandatory that they sign before their first day of work,” she says.?

There are a few exceptions to this rule.?

For instance, Illinois law includes a 14-day notice requirement for employees to review the clauses and take them to an attorney before signing anything.

The Pros and Cons of Noncompetes

The FTC proposal already faces opposition, including from members of the business industry.?

Recently, the U.S. Chamber of Commerce threatened to sue the FTC over its proposed ban on noncompetes. The business advocacy group argues that the agency is “overstepping its bounds and does not have the authority to lift noncompetes for all employers.”

AP News reports that opponents also believe noncompete clauses encourage companies to “promote workers and invest in training, especially in a tight labor market,” by facilitating retention. Other argued pros of noncompetes include protecting established companies from startups, reducing industry competition, and, as previously mentioned, supporting things like USPs.

“All the benefits of a non-compete heavily lean to protect the company (not the employee or incumbent),” shares Saffro. Her list of noncompete disadvantages is as follows:

• Limiting the employees right to practice their trade and stay in the given industry.
• Limiting the employee in terms of what they can do within the industry they know (sometimes this is very restrictive and will prevent them from doing anything that has any sort of overlap in product or service).
• Forcing the incumbent employee to essentially leave the industry they know to "sit out" until their non-compete expires. This in turn often forces the incumbent to find a job in another industry where they don't have experience and take a significant pay cut.
• Legal fees for both the company and former employee (often the employee is more affected since their previous employer either has retained counsel or in-house counsel).
• Eliminating qualified, experienced and skilled talent from the workforce in their industry.
• Used as a scare tactic for the employee.

In many ways, it would seem that the cons outweigh the pros — hence the FTC’s rule proposal and fierce crackdown on harmful noncompete clauses.

“If the FTC bans non-competes, this will be a big win for employees as it would allow them the right to leave one employer and work for another employer at will, regardless of the space their new employer works in or the product/services they sell,” says Saffro. “This allows an employee with a non-compete to continue their career in their industry, practice their trade and be a valuable asset to a new hiring company without legal restrictions.”

Navigating Existing Noncompete Clauses?

Already bound by a noncompete agreement, but want out before the FTC proposal? There’s very little you can do, says Saffro.

“If you've already signed a non-compete, there's nothing to do now. If you plan to leave your employer in the near future, you may want to wait to see if this ban goes into effect, as that will significantly impact your job search and ability to maximize your opportunities by leveraging your industry experience.”

She warns those leaving their company before any decision is made that they cannot pursue employment in “any competitive realm unless/until the FTC bans these agreements or [their] agreement expires. In the event the FTC bans these agreements, employees will be free to move on without legal ramifications, whether they are currently employed or not.”

So will non-compete clauses actually become a thing of the past for the entire U.S.??

We’ll have to wait and see.

As mentioned, an official decision could come months (or years) from now. The public is encouraged to participate in the commentary period. All comments are due March 10.

Top Takeaways?

The U.S. Federal Trade Commission (FTC) recently proposed a rule to ban noncompete clauses. However, it could take a while for a formal decision to be made.

• One in five workers (approximately 30 million people) are bound to noncompete clauses. This means they are restricted from working for a rival of their employer or starting a competing business for a specified time.
• The FTC estimates that the ban will result in workers’ earnings increasing by almost $300 billion each year.?
• Those in favor of the ban say that it’ll help with worker mobility, in addition to the wage increase. Others in opposition claim that noncompetes protect established companies from startups, aid in retention and even protect companies’ originality.
• A public commentary period is open through March 10, allowing folks to provide direct input on the potential ban before it goes into effect.?