Businesses and lawyers are beginning to consider what the Federal Trade Commission’s proposed ban on non-competition clauses in employment contracts might mean for worker mobility, wages and the way future compensation agreements are designed.
While a full or partial ban could widen the pool of potential hires, it would also weaken a tool employers rely on to retain talent and protect trade secrets and other proprietary information, lawyers say. More companies would likely turn to a patchwork of alternative mechanisms to deter employees from leaving the company and taking valuable information with them, including non-disclosure agreements and employment contracts that reward longevity, they say.
“Employers have acted with the understanding that they can protect their interests through non-compete agreements,” said Matthew Durham, a Salt Lake City-based attorney with Dorsey & Whitney LLP, who advises companies on labor matters. “What you’re seeing, reflected in the FTC proposal and elsewhere, is a growing hostility to the idea that there should be these kinds of restrictions, and it’s changing the environment that employers have been comfortable with in recent years .”
The FTC this month proposed a ban on almost all non-compete clauses, saying the clauses – which typically prohibit workers from moving to a new employer or starting their own businesses – impede competition in the labor market, suppress wages and stifle innovation and entrepreneurship . The proposal came in response to a 2021 executive order issued by President Biden.
Companies say they impose non-compete clauses on employees to protect trade secrets and other confidential information, including customer lists and financial records.
The FTC claims that non-compete clauses discourage innovation and entrepreneurship.
Photo: Eric Lee for The Wall Street Journal
Mr Durham and others say they believe the FTC may tighten its rule after hearing comments from the public, including employers and business groups, who have already signaled their opposition to the current proposal. For example, the agency could allow non-competition clauses for high-wage workers.
Non-competition clauses are common in employment contracts for senior executives such as software developers, sales reps, and top executives. Over time, they have been applied to many sections of the US workforce, including some janitors, baristas, school teachers, and young professionals. According to the FTC, one in five workers in the United States is currently subject to a non-compete obligation.
Non-competition clauses are regulated at the state level, and many states have already taken steps to restrict the use of the clauses, in some cases prohibiting employers from imposing them on those earning below a certain wage threshold or on certain types of workers.
“The vast majority of people in America cannot afford an attorney to defend a non-compete case,” said Jonathan Pollard, a Florida attorney who represents workers whose employers are trying to enforce non-compete clauses. “Even the threat of enforcement is often enough to hold talent back on the job market.”
The Federal Trade Commission proposed a new ban on non-compete clauses that the agency says harm workers and competition. Companies argue that they protect trade secrets. WSJ explains what a federal ban could mean for workers and businesses. Photo illustration: Jacob Reynolds
Some states, such as California and Oklahoma, hold that the clauses in all or almost all employment contracts are unenforceable.
A number of studies suggest that non-competition clauses suppress wages and innovation. A 2008 review of Oregon’s non-compete law for hourly workers found that wages increased by an average of 2% to 3%. Another study examining Hawaii’s 2015 non-compete ban on high-tech workers found an 11 percent increase in job changes and a 4 percent increase in salaries for new hires.
The clauses restrict not only pay and entrepreneurship but also career development, workers and some lawyers say.
Daniel Bachhuber had been working as a software consultant for many years when he decided to take an in-house position in autumn 2018. His new employer required him to sign a one-year non-compete agreement, which he said would have been so comprehensive that it would have prevented him from practicing his core skills if he were to leave the company or be fired.
Herr Bachhuber resisted. Earlier in his career, he was laid off to a new job for a few weeks shortly after the birth of his first child. If that happened at the new job, he reminded himself, he thought, he wouldn’t be able to make a living for a year. “I always think, worst case scenario, what kind of downstream protection do I have?” said the 35-year-old. “Even if I was employed for just one day, I couldn’t go back to the same clients I had.”
Daniel Bachhuber turned down a job after an employer failed to amend a non-competition clause.
Photo: Mason Trinca for The Wall Street Journal
He consulted an attorney and attempted to renegotiate the contract, hoping to salvage a position that would have expanded his skills and given him the opportunity to work directly with the chief technology officer on special projects. The company declined to change the non-competition clause and Mr. Bachhuber reluctantly declined the position.
Employers have other tools to protect information in addition to non-compete agreements, including non-disclosure agreements, trade secret laws, and non-solicitation agreements that prohibit employees from soliciting customers or employees from their former company.
But those tools can generally only be used after an employee breaches the agreement, said Julie Levinson Werner, an employer-partner at law firm Lowenstein Sandler LLP. “Once someone moves to another company, you’re really in the honor system. They have no way of monitoring what information is or isn’t disclosed,” she said.
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Observers on both sides say the clauses’ restrictions will force employers to get more creative in how they retain talent, using everything from pay to career advancement to engage employees and stay loyal to the company . Some companies use deferred compensation – such as B. loyalty bonuses or rolling stock options that vest after three years, for example – to give employees an incentive to stay.
“Do you get better results with honey or vinegar?” said Ms. Werner. “If you want to motivate people and make them happy to stay, you have to look at compensation, the overall environment and the way you treat them.”
The fate of the FTC’s final rule is in the air. After a 60-day comment period, the commissioners will consider possible changes to the original proposal and then issue a final rule. That rule is likely to be challenged by business groups or individual companies, and courts will determine its trajectory, lawyers say.
Write to Lauren Weber at [email protected]
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