Rethinking Non-Compete Clauses

Why the US FTC Ban on Non-Competes is a Step in the Right Direction

As a HR professional, If you’re anything like me, you’re always keeping an eye on global trends, you probably saw the SHRM newsletter email about the FTC banning non-competes in the US.

The FTC voted 3-2 to ban most non-competes for U.S. workers. The final rule and discussion is over 500 pages long, but it is intentionally broad and captures most non-competes for both employees and independent contractors

Now, let me share why this caught my attention. Just last week, I was reviewing a contract agreement that had a non-compete clause.

The employer’s stance?

The hired contractor couldn’t provide similar services to anyone else—individual or corporate—for a whole 10 years after working with them. Basically, it said the contractor couldn't work for anyone even remotely similar to their company for TEN whole years after the contract ended!

That's like saying a plumber can never fix a leaky tap, sink or faucet again after working in your house. Totally unreasonable, right?

So, I advised against signing the contract. Instead, I recommended pushing for a renegotiation with more reasonable terms. And of course, I emphasized the importance of seeking legal advice.

I can understand if you're wondering what qualifies me, as an HR professional, to give advice about legal matters like this.

Let me break it down for you.

First off, being in HR means I have to know and apply employment laws like the back of my hand - both locally and internationally. It's a huge part of my job. On top of that, my business management and MBA studies really drilled things like contract law, torts, and the legal side of operating a business into me.

I'm still learning about global labor laws all the time though, because it's a constantly evolving field.

So while I may not be a lawyer, the legal side of HR and managing employees is deeply ingrained from my education and career experience. I hope that helps explain where I'm coming from on this.

Before I go on,

For those wondering what even is non-compete clause or agreement?

Here's a basic definition: A non-compete agreement is a contract clause that says an employee can't go work for a competitor or share company secrets after they leave. It basically bars them from direct competition for a set period of time after their employment ends. Employers use these to protect their market position and intellectual property.

Let’s get into the new FTC non-compete ban rule and my thoughts on it.

The US Federal Trade Commission (FTC) has taken a significant step by voting to ban non-compete clauses in contracts for American workers. This move is expected to have a considerable impact on the labor market, promoting competition and increasing the freedom of workers to change jobs. The FTC’s final rule is projected to foster innovation, boost new business formation by 2.7% per year, and result in higher earnings for workers.

The ban would apply to all workers, including employees, independent contractors, interns, and even some franchisees. Essentially, it aims to eliminate practices that the FTC believes constitute an "unfair method of competition" and limit workers' economic mobility.

“The Final Rule prohibits an employer from entering into, or attempting to enter into, a non-compete clause with a “worker” (including, e.g., employees and independent contractors) or representing that a worker is subject to a non-compete clause.[2] The Final Rule allows employers to maintain existing non-compete agreements with “senior executives,”[3] (those with over $151,164 annual compensation and in a policy making position for the business) but bars an employer from entering into, or attempting to enter into, a non-compete clause with a senior executive after the Effective Date of the Final Rule.[4]”

This move could have far-reaching implications, not just for the American workforce but also for countries like Nigeria that have been grappling with the issue of non-compete agreements.

So Why a Ban on Non-Competes?

The way the FTC sees it, non-compete agreements have become super common these days, and they're really holding workers back in some major ways.

For one, these agreements can totally suppress wage growth by limiting how easily people can jump between jobs and negotiate better pay. It keeps workers from having much leverage.

But it's not just about the money.

The FTC argues that non-competes can straight up stifle innovation and competition too. Think about it - if employees can't freely move between companies or start their own gigs, it makes it harder for new ideas and skills to spread.

The incumbents get to just dig their heels in without any disruption.

And at the end of the day, a lot of workers don't really have a meaningful choice when signing these non-competes. The FTC believes it impairs their basic economic freedoms when they're forced into it without real negotiating power.

So by banning non-competes altogether, the FTC wants to flip the script. They're hoping it'll promote healthy competition by letting the labor market flow freely. Workers could leverage their skills and experience however they want without archaic restrictions. And ideally, that spurs entrepreneurship and innovation rather than protecting stagnant monopolies.

From an anti-capitalist perspective, this non-compete ban is a solid step towards loosening the grip that corporations have held over workers for way too long. These non-compete clauses have been called out time and again for stripping away employees' autonomy and agency.

At the end of the day, they're just another way the system keeps the little guy chained to serving the interests of big capital over actual human beings.

By restricting where people can take their talents and skills, non-competes are like the poster child for capitalism's mindset of putting profits before people's wellbeing. It's the embodiment of mega-corporations asserting: 'You work for us on our terms, and screw your personal or financial aspirations if they don't align with fattening our bottom line.'

That's why I'm 100% on board with nuking these non-compete rackets.

It's a meaningful attempt to rebalance some of the power disparities between companies and their workforce. If we really want to start dismantling the inherently exploitative structures that capitalism is built on, policies like this are a positive move in that direction. It helps re-empower workers to have more autonomy and bargaining leverage.

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