Imagine if employees could move freely between jobs without constraint, opening doors to new opportunities and fostering an environment of constant innovation and collaboration. For most of us, this isn’t hard to picture, but according to the Federal Trade Commission (FTC), one in five American workers (approximately 30 million people) are bound by non-compete clauses and are therefore restricted from pursuing better employment opportunities.
Suppose you are a phlebotomist, for example, who drives for long hours around upstate New York performing physical exams and collecting specimens. You get offered a job by a clinical lab that offered regular hours, higher pay, and no travel requirements, but the offer is rescinded when the company discovers you’re subject to a non-compete. Though hypothetical, this situation demonstrates the stark reality of the consequences the workers who agree to non-competes face.
As discussions around non-compete agreements gain momentum due to the possibility of a new FTC rule prohibiting employers from imposing non-compete clauses on workers, it’s important to investigate the potential outcomes of such a rule and examine the effects it may have on businesses, employees, and the overall economy. From increased labor mobility and enhanced competition to the potential risks to intellectual property and the startup ecosystem, we’ll explore the multi-faceted implications of a world with and without non-compete clauses.
In January 2023, the FTC announced its intention to introduce a new federal regulation preventing employers from entering into non-compete clauses with workers and requiring employers to rescind existing non-compete clauses.
The conversation around non-compete clauses is nothing new, as several states have enacted significant restrictions or limitations on their use over the years. California has a well-established limitation on the use of non-competes for California employees, in which they are generally unenforceable except in specific circumstances such as when a business is being sold. Other states, like Washington, significantly limit the use of non-compete agreements, particularly for employees earning below a certain income threshold.
Still, the FTC is seeking public comment on whether these and other similar non-compete laws are enough to combat the evidence that non-compete clauses suppress wages and hinder both innovation and economic liberty.
If after the public comment period ends, and the FTC decides to finalize the proposed rule, there could be several potential implications for American businesses, employees, and the economy. These implications can be both positive and negative, depending on your perspective and context. Let’s delve in.
- Increased labor mobility: When employers use non-compete clauses to restrict workers from moving freely, they have the power to suppress wages and avoid having to compete to attract workers. Without non-compete clauses, employees would be free to move between jobs and industries without the fear of legal repercussions. Increased labor mobility could follow, allowing individuals to pursue better job opportunities and career growth. According to FTC estimates, the proposed rule could increase workers’ earnings across industries and job levels by $250 billion to $296 billion per year.
- Enhanced competition and innovation: Per the FTC, evidence shows that non-compete clauses hinder innovation in several ways—from preventing would-be entrepreneurs from forming new businesses to inhibiting workers from bringing innovative ideas to new companies. Greater labor mobility could lead to increased knowledge transfer between companies, fostering competition and innovation. As employees move between companies, the influx of new ideas and perspectives could drive advancements in technology and business processes.
- Improved bargaining power for employees: If non-compete clauses were illegal, employees would have more leverage in negotiating better employment terms such as higher salaries, better benefits, or improved working conditions. Employers would need to offer more competitive packages to retain and attract talent.
- Potential loss of trade secrets and intellectual property: Without non-compete clauses and greater mobility comes bigger risk to companies who need to protect their confidential information. Businesses may lose valuable trade secrets or intellectual property to competitors by way of former employees sharing proprietary information in their new roles, which could harm the original company’s competitive advantage.
- Increased litigation: In the absence of non-compete clauses, businesses might turn to other legal methods to protect their interests, such as non-disclosure agreements, non-solicitation agreements, or trade secret litigation. This could result in an increase in legal disputes and associated costs for employers and employees alike.
- Short-term adjustments for businesses: Companies that have traditionally relied on non-compete clauses to protect their interests may need to adjust their business strategies. This could involve investing more in employee training, internal innovation, or other retention strategies to maintain their competitive edge.
- Effects on startup ecosystem: As mentioned above, non-competes may also be preventing would-be entrepreneurs from forming new businesses. The FTC estimates that the new rule would double the number of companies founded by a former worker in the same industry. Thus, without non-compete clauses, it may become easier for employees to leave established companies and start their own ventures or join startups, fostering a more vibrant startup ecosystem. On the other hand, established companies may also face increased competition from these new market entrants.
A Fork in the Road
Non-compete clauses present a complex interplay between safeguarding businesses and empowering employees, striking a delicate balance that can influence innovation, competition, and individual growth. While these agreements can protect a company’s intellectual property and maintain its competitive edge, they can also restrict employees’ freedom to explore new opportunities and hinder labor mobility.
As the debate around non-compete clauses continues to unfold, it is crucial for policymakers like the FTC, employers, and employees alike to consider both the advantages and drawbacks of these agreements. Hopefully the FTC can create a fair and balanced legal framework that supports the long-term success of businesses while encouraging employees to reach their full potential, ultimately benefiting the economy as a whole.
If you have strong feelings about how the use of non-compete clauses impacts workers and businesses in America, the FTC will be accepting comments on the proposed rule until April 19, 2023. For more information, we encourage you to visit the FTC’s website.
Ironclad is the #1 contract lifecycle management platform for innovative companies. L’Oréal, Cisco, Mastercard, and other leading innovators use Ironclad to collaborate and negotiate on contracts, accelerate contracting while maintaining compliance, and turn contracts into critical carriers of operational business intelligence. It’s the only platform flexible enough to handle every type of contract workflow, whether a sales agreement, an HR agreement or a complex NDA. The company was named one of the 20 Rising Stars on the Forbes 2019 Cloud 100 list, and is backed by leading investors like Accel, Y Combinator, Sequoia, and BOND. For more information, visit www.ironcladapp.com or follow us on LinkedIn and Twitter.
More stories from our team.