Noncompete clauses – should they be banned?

A major consideration when hiring for the last couple of decades has been the issue of noncompete clauses in employment contracts. They can prove problematic for employer and employee, and potentially even for the company that the person is leaving. Will/should it be enforced, or will it not? Is it enforceable at all? Which jurisdictions does it cover, and would a court consider it to be reasonable?

All these considerations may be a thing of the past. In April of this year (2024) the US Federal Trade Commission has essentially banned noncompetes with the aim of protecting freedom of workers to change jobs, increasing innovation, and fostering new business formation. The commission quoted the following:

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC Chair Lina M. Khan. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

The evidence for this appears to have been gathered from a consultation period that started back in January 2023 that received 26000 comments, where most (25000) supported the ban.

The rest of the world is of course, not governed by the edicts of the FTC, but it is often the case that in the business world, where the US leads the rest of the western world follows.

It is perhaps not unsurprising that most respondents to the consultation were in favour as most will be employees, and there is no doubt that as an employee a noncompete can be a worrisome encumbrance.

But what of employers?

One of the major advantages of non-compete clauses is that they can help employers protect their investments in training and developing employees. By restricting staff from easily using their acquired knowledge and experience to benefit a competitor, employers can ensure that they are able to recoup the time and resources they have invested in their employees. Noncompete clauses can also help employers retain key employees and reduce turnover (to the whole team benefit), further increasing the employer’s confidence in employee investment. This may be of particular importance to an SME. Knowing that they will not be able to easily jump ship to a competitor, employees may be less easily coaxed away on a whim and more likely to stay with their current employer and help the company succeed.

What then, are the FTC’s alternatives?

They suggest the use of non-disclosure agreements, which most employees will have anyway. My concern with this is that it does not discourage larger unscrupulous competitors from allowing small companies to train and develop people and then approaching them with hugely inflated offers, cynically entertaining the idea that whether they then retain their new hire or not they have damaged the operating capacity of their smaller competitor.

It will be interesting to see how this plays out. I suspect that both in the US and elsewhere there may be unseen unintended consequences.

?What do you think?

Has this affected you or your company?

Please share your thoughts in the comments section.

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Remtec Talent Management Ltd

Nigel Job, CEO/Founder

+44 (0) 7710 836 825

[email protected]

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