The Federal Trade Commission wants to banish non-compete agreements, which allow employers to restrict workers who leave their current jobs from working with a competitor under some instances, K. Nichole Nesbitt, managing partner at Goodell DeVries, writes for JD Supra. Those non-compete restrictions can pertain to a specific period of time and/or within specific geographic locations.
The FTC proposal argues that non-compete agreements restrict workers from taking advantage of better opportunities in their fields, and that this can lead to reduced competition among businesses and lower pay for workers. The proposal would not only ban non-compete agreements going forward, but also apply retroactively to existing agreements.
“The rule defines a non-competition clause as a term that 'prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker's employment with the employer,’” Nesbitt writes. “Importantly, the rule does not just ban non-competition agreements that carry the label but any contractual provision that has the same effect, including non-disclosure agreements or even provisions that require workers to pay back employer-provided education or training stipends if they are so onerous as to effectively preclude a worker from leaving.”
The FTC’s comment period for its proposal ended in April, drawing in more than 26,000 comments including from the United States Chamber of Commerce and the Society for Human Resource Management, NBC News reports. Both those organizations echo the strong objections to the proposed ban from many businesses.
More than 280 organizations joined in a joint comment letter from the Chamber, which had threatened to sue the FTC in January over the proposal. That April 17 letter notes non-competition agreements encourage employers to invest in their employees and safeguards intellectual property and confidential information.
“As the FTC’s own economist John McAdams recently explained, noncompetes ‘allow firms to reduce recruitment and training costs by lowering turnover,’ encourage firms to offer higher wages to compensate new employees, and ‘increase the returns to research and development,’ thereby promoting innovation,” the letter reads “Unfortunately, the Commission ignored or downplayed this evidence, thereby undermining ‘confidence in the integrity of the rulemaking process or the ultimate outcome.’”
SHRM in its comment letter blasted the FTC proposal as “overbroad” and as an endangerment to employee training and development, NBC News reports. The group, which represents 325,000 HR professionals and executives globally, noted in its letter that it shared with NBC News that the non-compete clause “will impede SHRM members’ ability to balance the needs of workers and employers and will reduce the contractual capabilities of reasonable and consenting parties.”
The FTC estimates that banning non-competes would widen career options for 30 million Americans and boost wages by almost $300 billion a year, CNBC reports. But the chamber, which called the proposed ban “blatantly unlawful”, said the FTC’s claims about the huge pay increases are not grounded in reliable data, according to JD Supra.
“Given that the ban is retroactive, any business that regularly employs non-competition agreements should identify all agreements in place that may contain such a provision,” Nesbitt writes for JD Supra. “This includes not just employment agreements with current employees, but also separation agreements with departed employees and even sign-on agreements with employees who were hired subject to a non-competition agreement with a previous employer. If a ban or significant restriction on these provisions is passed, knowing which contracts are affected will provide an important head start.”
Evan Starr, an economics researcher at the University of Maryland, notes that about 30% of employers in the private sector have all their employees sign non-compete agreements, NBC reports. “There are many things that firms can do to protect themselves without noncompete agreements,” Starr said. Should the FTC proposal be adopted as rule, “we’ll definitely see more of the reliance on nondisclosure, non-solicitation [agreements] and more of the kind of perks such as higher wages, better benefits, etc.”