- Edward Clough
Employee Non-Competes: Servitude or Savior? The FTC Weighs-In
Some companies use non-compete agreements to restrict employees from working for a competitor during or after their employment. A proposed rule by the FTC would outlaw the use of these “non-competes” in most employment situations. While this is good news for employees, it presents a challenge for employers trying to protect their business interests and confidential information.
20% of Workforce Affected
Many white-collar workers, like bankers and tech executives, are subject to non-competes because of their access to highly sensitive information. But over the last few years, non-competes have crept into the realm of blue-collar workers, and now 1 out of 5 U.S. workers are subject to some sort of non-compete. This expanded use has been criticized as unfair and detrimental to workers.
Criticisms and Restrictions
Non-compete agreements, as a form of contract, are typically governed by state-specific contract law. And some states—such as California and Oklahoma—already impose limitations on their use with employees. Now, these agreements have caught the attention of the federal government.
The FTC argues that non-competes stifle competition in the labor market, depress salaries, and stunt innovation. The agency contends that employee non-competes block workers from freely switching jobs, thereby depriving them of higher wages and better working conditions.
Some studies tend to support this view. An analysis of Oregon’s 2008 ban of non-competes for hourly workers showed that wages increased by an average of 3% after the ban. A similar ban on non-competes for tech industry workers in Hawaii in 2015 showed job-mobility rose 11% and salaries rose 4%.
Business Groups Oppose the Ban
Businesses argue that they need to use non-competes to retain talented personnel and to protect their company’s sensitive information, like trade secrets, client lists, financial data, and business plans.
Trade organizations intend to oppose the FTC on this rule, and plan to take the agency to court if necessary. They see the FTC’s move as an un-constitutional abuse of power. Suzanne Clark, president of the U.S. Chamber of Commerce, remarked in the Wall Street Journal recently that “if the FTC can regulate noncompete agreements without authorization from Congress, there is no aspect of employment or commercial arrangements that it doesn’t have the authority to regulate or ban arbitrarily.”
Alternatives to Non-Competes
If the proposed FTC ban survives legal challenges, employers will have to look for other ways to protect their interests. Similar results may be achieved by using a combination of other devices, like: (a) non-disclosure agreements (“NDAs”, which restrict the disclosure of confidential information), (b) trade secret laws, and (c) non-solicitation agreements (which prohibit the poaching of clients).
In addition to these restrictive measures, employers might consider trying to retain talented employees using “deferred compensation”, whereby a portion of the employee’s compensation is held-back and then only paid out if the worker stays on with the employer (e.g., restricted stock or cash bonuses that are granted, but not distributed until some future point-in-time).
Regardless of whether the FTC ban of non-competes becomes law, state-specific restrictions—in New York and elsewhere—are limiting their usefulness. Savvy employers should consider alternative measures like NDAs and non-solicit provisions to replace, or supplement, their non-compete agreements.
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