What HR Should Know About Noncompete Agreements
What’s the latest on the U.S. Federal Trade Commission’s proposed ban on noncompete agreements? And what should HR be aware of?
Noncompete agreements work like this: employees are asked to sign them (usually as a condition of employment), pledging that if they leave their employer, they won’t go to work for a competitor or start a competing business within a certain period of time and/or geographic area (e.g., with the same city, state, or a radius of miles).
If adopted, the ban on such agreements proposed by the FTC in January 2023 would end all of that, be nationwide in scope, and apply to almost all private employers, regardless of company size or location.
This means in most cases, employers wouldn’t be allowed to ask new hires to sign non-compete agreements, and current agreements would be rescinded, freeing workers to leave and start their own businesses or go to work for whomever they choose without penalty.
And employers would have to give written notice to both current and former employees that their non-compete agreements are no longer in effect.
The argument for noncompetes
Supporters of noncompete agreements say they protect employers by:
- Prohibiting employees from disclosing confidential/proprietary trade secrets/taking client lists, etc. (trade secret and confidentiality agreements are difficult to police because you have to catch the employee taking confidential information). Noncompete agreements are simple to enforce--either you are working for a competitor you are not.
- Reducing turnover by barring workers from jumping ship in favor of the competition.
- Reducing costs of training and developing due to attrition.
- Giving employers leverage in future negotiations with workers.
- Stifling competition for talent in the region/industry.
The argument against noncompetes
Critics say that noncompetes:
- Are exploitative, suppress wages, and hurt both workers and the economy.
- Prevent workers from having career mobility; this is especially true for hourly workers, who for example are not able to leave one fast food restaurant and go to work for another one across town without risk of violating such an agreement.
- Discourage some people from accepting a job offer if a noncompete agreement is required.
The U.S. Chamber of Commerce has called the proposed ban an outrageous overstep and declaration of “war on business”—and has threatened to sue the FTC. The Chamber asserts that the proposal is a first step in a planned expansion of the FTC’s powers to regulate policy.
On the other hand, in the FTC’s press release outlining the proposed ban, Chair Lina M. Khan said:
“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy. Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
Supporters of the proposed ban also say that ending noncompete agreements will increase competition for workers and businesses alike—fueling innovation and the economy. The FTC estimates that the ban could result in wage boosts by as much as $300 billion per year and increased career and entrepreneurial opportunities for about 30 million in the U.S.
Who do noncompetes really help?
The ethics of noncompetes are clear to critics; if a job doesn’t work out for whatever reason, should an hourly worker be prevented from moving on to a local employer they’re better suited for?
In addition to blocking people from moving on to new opportunities, enforcing noncompetes can have other less visible results, such as encouraging quiet quitting and mistrust of employers.
Noncompetes can also tarnish employer brand in general—who wants to work for an organization that has policies that are perceived as controlling or vindictive toward workers?
“Non-competes aren’t a good idea for employers—they’re difficult to enforce, very expensive to litigate, and in most cases, just not worth the ordeal."
“While noncompete agreements have their place for certain employees, they aren’t a good idea for employees who do not have access to a company’s customer relationships or its trade secrets. In those cases, they're difficult to enforce, very expensive to litigate, and just not worth the ordeal. Noncompete litigation can often drag out for years and become personal—basically becoming a death match that no one wins,” said Aaron Goldstein, a Seattle-based employment lawyer, with whom we recently spoke. He cautioned: “Employers should think very carefully before requiring their employees to sign noncompete agreements, and even more carefully before suing to enforce them.”
What should HR keep in mind
So, should HR leaders write off the proposed ban as something not worth worrying about? No, not at all, Goldstein says.
“HR leaders should have a contingency plan in place—always assume there’s a possibility it could pass—while we don’t think it will likely pass nationally, it will no doubt arise in state legislatures. Non-solicitation clauses are much easier to enforce and, in most jurisdictions, not nearly as highly regulated. Companies should take a hard look at their existing noncompete agreements and see if a solid nonsolicitation agreement might be more appropriate.”
Noncompete agreements between workers and their employers are already against the law in some states (California, North Dakota, Oklahoma, and Washington D.C.), and Goldstein expects we will likely see such prohibitions adopted in more states in the future.
Colorado has taken steps to significantly limit the use of both noncompete and nonsolicitation agreements. Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, and Washington state also prohibit noncompete agreements unless the worker earns above a certain threshold.
The FTC’s proposal wouldn’t apply to other types of employment restrictions, such as nondisclosure agreements.
But with the Chamber of Commerce threatening a lawsuit, the typical cycle for a proposal like the FTC’s, (about eight months) may stall—at least for a while. The phases are:
- Notice—this happened January 23, 2023
- Public comment period (ends March 31, 2023)
- Compliance review (takes an average of 180 days to process)
And while HR leaders should be prepared for anything, Goldstein says it’s unlikely the ban passes.
“The bottom line to all of this is that even if the noncompete ban is formally adopted by the FTC, it would inevitably end up before the Supreme Court. And the Court would undoubtedly strike it down as an administrative overreach. The Supreme Court is likely to rule that the FTC is a non-elected administrative agency and therefore does not have the power to adopt rules like this, which are more appropriately passed through legislation.”
Lorrie Lykins is i4cp's Vice President of Research