For decades they have been fixtures in contracts between employers and workers, but if the United States Federal Trade Commission (FTC) has its way, the non-compete clause will become nonexistent. On January 5, the FTC proposed a rule to ban non-compete clauses citing them as an unfair method of competition and inviting public comment on the proposal.
A non-compete clause is a contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, according to the FTC. It is typically confined to a certain geographic area and period after the worker’s employment ends.
“About one in five American workers—approximately 30 million people—are bound by a non-compete clause and are thus restricted from pursuing better employment opportunities,” the FTC said in a statement. “Because non-compete clauses prevent workers from leaving jobs and decrease competition for workers, they lower wages for both workers who are subject to them as well as workers who are not.”
From the FTC’s perspective, non-compete clauses also prevent new businesses from forming. This stifles entrepreneurship and prevents innovation that would otherwise occur when workers are able to broadly share their ideas.
As such, the FTC proposes preventing employers from entering non-compete clauses with workers—including independent contractors—and requiring employers to rescind existing non-compete clauses.
“The Commission estimates that the proposed rule would increase American workers’ earnings between $250 billion and $296 billion per year,” it said. It could also save consumers up to $148 billion annually on health care costs and double the number of companies founded by a former worker in the same industry.
While it’s reasonable to have some level of protection for business interests, the non-compete notion has always been flawed, according to Kathleen Quinn Votaw, CEO of TalenTrust (www.talentrust.com), a strategic recruiting and human capital consulting firm recognized in the Inc. 5000.
“I don't think they're in the best interest of anyone because we all work so we can have a better life for ourselves, our families,” she told Advisors Magazine recently. “And on the flip side, employers need to protect the business they've built, and they have a right to protect what they've built,” Quinn Votaw added. “They've spent money, they've mortgaged homes, they've spent years creating intellectual property. So, it's not okay to steal their ideas, run off and do your own thing.”
Quinn Votaw has more than 30 years in the talent retention and recruitment business. She is the author of two books, DARE to CARE IN THE WORKPLACE: A Guide to the New Way We Work, and Solve The People Puzzle: How High-Growth Companies Attract & Retain Top Talent. Regarded as a key disruptor in her industry, Quinn Votaw has helped thousands of companies across multiple industries develop purpose-based, inclusive communities that inspire employees to come to work.
In short, she maintains that any employee who's reasonable would think it's also reasonable for an employer to protect their customers and the business they’ve built. At the same time, Quinn Votaw believes the business should be reasonable about what it is trying to protect.
“A business is trying to protect the intellectual property, its ideas, its customers, concepts, pricing schedules—anything confidential and proprietary that isn't necessarily available out there in the universe,” she said. “And as long as employees don't take that from the business and go use it or disclose it to another employer, there shouldn't be an issue.”
If the non-compete clause is gone, something like a non-solicitation clause is what employers still need and would want—to prevent the sale or sharing of business knowledge, according to Quinn Votaw. She also notes that there has long been a debate about whether non-competes really do hold up in court, so there must be better alternative contract language.
In addition to banning employers from entering non-compete clauses with their workers, including independent contractors, the rule would require employers to rescind existing noncompete clauses with workers and actively inform their employees that the contracts are no longer in effect
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Exemption for senior executives?
The proposed rule seeks public comment on several topics, in particular: whether franchisees should be covered, whether senior executives should be exempted from the rule (or subject to something other than a ban), and whether low- and high-wage workers should be treated differently under the rule.
To be clear, the FTC’s January 5 notice of the proposed rule was just the first step in the rulemaking process. Stakeholders will have sixty days to comment on the proposed rule following publication in the Federal Register. The FTC will review the comments and may revise the proposed rule before publishing a final version. As currently drafted, the final rule would take effect 60 days after it is published in the Federal Register, and employers will have until 180 days after its publication to comply with its requirements.
Just days prior to the proposed rule change, the FTC took actions against companies and their executives for imposing non-compete restrictions on their workers in violation of Section 5 of the FTC Act, which bans unfair competition:
The FTC acted against Prudential, a Michigan-based security guard company, and its two owners, alleging that the company's use of non-competes against its workers was coercive, exploitative, and tended to negatively affect competitive conditions. The FTC’s order requires Prudential to terminate its non-competes with all the security guards it had hired and actively notify the workers that these non-competes are now void.
The FTC’s actions against Owens-Illinois and Ardagh target the use of non-competes by dominant firms in the highly concentrated glass manufacturing sector. In the complaints, the FTC alleged that the companies’ use of non-competes locked up highly specialized workers, tending to impede the entry and expansion of rivals by depriving them of access to qualified employees. The relief secured by the FTC prohibits the firms from imposing and enforcing non-competes with workers and requires firms to inform workers that these non-competes are now void.
