Your dream job comes along, but somewhere in that fine print, you spot a noncompete clause. Your heart might sink at the risk/reward dilemma you now face. At the end of the contract, what will you do for the year it states you can’t work with competitors? And, for small business owners or freelancers, how much potential business might you lose?
The new ban on noncompetes
The Federal Trade Commission (FTC) recently announced its ban on noncompete clauses. A noncompete clause “blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends,” the FTC says. For freelancers in particular, who now make up over a third of the entire U.S. workforce, noncompetes are especially tricky.
The FTC voted 3-2 on April 23, 2024 to ban (for-profit) employers from requiring employees or independent contractors to sign noncompetes and will make all current noncompetes unenforceable once the rule goes into effect later in the year. The only exception to this is for senior executives within a company or those earning more than $151,164 annually and who are in a policy-making position.
Why is the noncompete clause a problem?
Some employers have long pushed for these noncompete clauses, which currently bind nearly 1 in 5 Americans, to protect confidential information, trade secrets and more. But the FTC shared in its decision that they aren’t necessary to protect those items because businesses can utilize confidentiality clauses instead.
“I have always believed that noncompete clauses are anti-people. I believe it’s ridiculous for a company to dictate where someone can and cannot work. Employees are not property and it should never be a goal of an employer to control their people. The goal should be to put them in a position to succeed and to invest in their growth,” says Billy Moyer, fractional chief people officer and management consultant with SOS Leadership in Austin, Texas.
The National Employment Law Projects points to these clauses being particularly damaging to workers of color and women as the clauses have been shown to “depress wages, reduce job mobility and stifle labor competition that can lead to better workplace conditions.”
Moyer has witnessed this too. “I have seen the opposite of this when I have seen companies lay off someone and then enforce a noncompete that forces them to look for work outside of what they have done for 20 years. This negatively impacts their livelihood, and for what? So the company can feel powerful? So they can stick it to a competitor that may want to hire that person?”
The effective date begins 120 days after publication, not the FTC’s announcement last week, so it’s unclear exactly when employees can look to see if the ban impacts them.
The debate on noncompetes
Not everyone agrees with a ban. The U.S. Chamber of Commerce is seeking legal action against the ruling, stating that the FTC is exceeding their administrative authority. Per the ruling, the FTC states that noncompetes are unfair methods of competition. The American Hospital Association is also against the FTC’s new ruling, citing that many of their nonprofit and for-profit hospitals operate within the same area, and it would give certain hospitals a hiring advantage over others.
“Legal challenges have already been filed and the rule may never actually take effect,” says Peter Rahbar, employment attorney, workplace issues expert and founder of The Rahbar Group in New York.
Rahbar explains that the noncompete debate has historically been a state-by-state matter. “This changed in 2021 when President Biden issued an executive order directing the FTC to ban or limit the use of noncompetes. The president and the commission believe that noncompete agreements stifle competition, innovation and wage growth,” he says.
“Initially, the FTC focused on enforcement actions in connection with corporate mergers. The commission then announced this proposed rule… to the surprise of businesses, workers and everyone who works with noncompetes. After months of research and public comments that were overwhelmingly in support of the rule (over 25,000 of 26,000 submitted comments were in support), the final rule was announced,” Rahbar says.
Employees speak out about past injustices with noncompetes
Those who have felt exploited by noncompetes are speaking out about the ramifications for their career path. Trish Sammer, a senior content marketing strategist, shared the following message on LinkedIn after the ban was announced:
“Early in my career, I took a job at a company that required people to sign extremely limiting non-compete agreements. I really wanted the job and I didn’t know any better, so I signed it. What I didn’t know was that the company owner had a reputation as someone who sued people for sport. People stayed for years longer than they wanted to because they were afraid of getting sued.
When I left, I was briefly named in a lawsuit over my non-compete. The action against me was dropped, but not before I hired a lawyer at my own expense and gave a deposition. I swore I would never sign a non-compete again.
Doing away with non-competes is a victory for working people. Companies shouldn’t be able to limit your career opportunities, including the opportunity to leave their employ and find something better.”
Businesses react
Lauren Winans, CEO and principal HR consultant for Next Level Benefits, an HR consulting practice in Wexford, Pennsylvania, says businesses themselves have had a “mixed” reaction.
“Some argue that the ban could harm businesses by making it harder to protect trade secrets and investments in employee training, potentially leading to increased competition for skilled workers,” she says. “Others, particularly in sectors that rely heavily on innovation and proprietary knowledge, worry about the loss of a tool that helps maintain a competitive edge.”
“While employers claim they need noncompetes to protect trade secrets and maintain customer relationships, other means of safeguarding proprietary information better resolve those concerns,” says Paul Glover, former federal trial lawyer specializing in employee law and current leadership trainer in Downers Grove, Illinois.
“Employers often use noncompete clauses so they don’t have to increase their employees’ wages to meet the marketplace rates for their employee’s talent and face competition from their employees who decide to go into business for themselves. In this age of available information and increased mobility available to employees, the noncompete clause has outlived its reason to exist.”
The implications of a workplace with noncompetes
Workplace experts, lawyers, employees and business leaders are watching to see what a noncompete-free workplace might look like and how it will impact different industries. Here are a few predictions:
- Commission-based sales teams may see a major impact. “Noncompetes previously restricted these employees from joining competitors, even if their success hinges on personal relationships. Now, these workers can freely leverage their networks, potentially posing a challenge for some businesses,” says Tara Bodine, HR consultant and founder of True North People Consulting in Massachusetts.
- Leaders will have to raise their bar of workplace environment and culture more to organically retain employees. “This ban offers an opportunity for leaders and organizations to rethink and rehumanize their workplaces in such a way that mitigates the risk without creating more dysfunction,” says Nikki Innocent, a holistic coach for career, life and interpersonal change in New York. “This is a chance to reframe working somewhere as a choice you freely make each day from a place of alignment, intention and expansion rather than from a place of resistance, fear, survival and scarcity. It is a beautiful opportunity for modern leaders to innovate and build a new healthier workplace norm because survival mode is not where healing and innovation happen.”
- It may boost the economy. “By removing barriers to job switching, it’s anticipated that there will be a more dynamic labor market, potentially leading to overall economic growth and efficiency,” Winans notes.
- Employers might adjust their policies around trade secrets and proprietary information to ensure it’s protected. “This rule does not prohibit other measures that could be just as, or even more, effective than a noncompete. Smart employers have been doing this as states have been increasing their efforts to ban or limit noncompetes over the past decade. For others who have not, consider yourself warned,” Rahbar says.
Bodine predicts it’s the next step in the future of work and a welcome one for many. “Overall, the FTC’s decision signifies a shift toward a talent-driven workforce, where employee well-being and innovation take center stage.”
Photo by JLco Julia Amaral/Shutterstock.com
