This January, the Federal Trade Commission announced a new proposed rule that would ban noncompete agreements across the country. According to the FTC, noncompete agreements constitute an unfair method of competition, therefore violating Section 5 of the Federal Trade Commission Act.
Naturally, employers are left with a lot of questions about how they should move forward. What would this rule mean for you in the future? It’s important to note that the text of this rule is not final, so a lot could change over the course of the consideration period. However, if you’re looking to be prepared for what’s to come, here’s what you need to know:
What does the proposed rule say?
The FTC’s proposed rule would generally prohibit employers from using noncompete clauses. Specifically, it would make it illegal for employers to:
- Enter into or attempt to enter into a noncompete with a worker
- Maintain a noncompete with a worker
- Represent to a worker, under certain circumstances, that the worker is subject to a noncompete
This rule would also apply to independent contractors. Plus, it would require employers to rescind existing noncompetes and actively inform workers they are no longer in effect. You can read the full text of the proposed rule here.
What effect have noncompete agreements had on the labor market?
Currently, about one in five American workers has signed a noncompete agreement. Some might argue that noncompete agreements are only found at the executive level. However, they are still most commonly found among the middle-class. These agreements can have chilling effects, including:
- Reduced earning potential: Job hopping is one of the most effective ways to increase your income over time. However, when that possibility is removed or reduced, employees will likely experience stagnated wage growth over time when they are forced to stay at the same organization.
- Reduced productivity: Productivity runs against both employees and employers when a noncompete agreement is in effect. An employee might never know that they would thrive at a different organization. And, employers could lose out on incredible talent who are also under a noncompete elsewhere. Instead of everyone finding the best fit for them, they become stuck.
- Reduced entrepreneurship: Noncompete agreements also often cover the inability to branch out and start your own business within the same industry. This reduces competition over time.
- Reduced employability: When an employee is unhappy or treated unfairly by an employer, they will have significantly fewer options when it comes to finding a better job in their field.
What will happen if the ban goes into effect?
If the ban goes into effect, employers would likely be required to follow the rules set in the final version of the FTC’s proposal. As of now, employers would be required to rescind all noncompetes, notify employees, and stop requiring them during the hiring process.
While this may sound challenging, employers will likely still be able to protect trade secrets or client lists through nonsolicitation agreements and confidentiality agreements.
Additionally, the FTC estimates that the elimination of noncompete clauses could generate new job opportunities for as many as 30 million workers and raise wages by $300 billion. For middle-class employees currently subjected to a noncompete, this could be life changing. And for employers struggling to hire, this could burst the talent pool wide open.
What are the next steps of this process?
The FTC is seeking public comment for a period of 60 days, closing on March 20, 2023. In this public comment period, they are looking for opinions on questions like:
- Should franchisees be covered by the rule?
- Should senior executives be exempt from the rule, or subject to a rebuttable presumption rather than a ban?
- Should low and high-wage workers be treated differently under the rule?
After the public comment period, the FTC will review and consider public comments before issuing a final draft of the rule, which would also announce when the rule would go into effect. However, this could also face legal challenges down the line.
What should employers do?
Since nothing is official yet, you may be inclined to wait and see how this plays out. However, it’s important to note that the conversation is changing. The final shaping of the rule and whether it stands up in court will not change the fact that your employees will increasingly be put off by the idea of adhering to a noncompete agreement.
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If you’re looking to secure top talent, there is more you can offer than a legal threat if they want to leave. Instead, take a look at your development and growth opportunities, compensation structures, and management practices. Turn your organization into a place they wouldn’t want to leave.