What Businesses Say About Noncompetes
The Federal Trade Commission (FTC) has proposed a new rule that would ban the use of noncompete agreements in the United States. As my colleague Sean Heather has written, the proposed ban isn’t rooted in any authority granted to the agency by Congress. And, if allowed to go into effect, will be the bedrock upon which the FTC will write additional competition rules to micromanage the U.S. economy. For its part, the FTC claims that eliminating noncompetes will improve worker mobility.
But what are businesses saying about how it would impact hiring? We conducted a survey to find out.
What businesses are saying
In our survey, we found that 80% of our respondents utilize restrictive covenants – including noncompete agreements – but 62% said that less than 10% of their U.S. workforce is subject to noncompete restrictions. Furthermore, we found that 78% of employers who responded offer additional compensation that covers the span of the noncompete duration or longer. As such, an appropriate exchange exists where businesses ensure their sensitive information is safeguarded while providing financial support to former employees.
We asked participants how many times an employee subject to a noncompete agreement was able to join a competitor based on a successful negotiation between the employer and employee or competitor. The answer? Nearly half of the respondents have successfully reached a compromise that allowed both the employer to protect their interests and the employee to enter into new employment opportunities.
If a ban on noncompete agreements entered into force, the workforce can anticipate fewer opportunities and reduced investments in their education, training, and development. 67% of our respondents agreed that a near-total ban on noncompete agreements would have a negative impact on their business’s talent strategy and/or compensation strategy. Our survey found that employers would have to reduce the sharing of sensitive information with employees, and reduce or defer compensation with employees should this ban take effect. In sum, a poorly executed ban on noncompete agreements will not only hurt businesses, but could harm employees, too.
Where local governments have stepped in
There are concerns that some noncompetes reach beyond the necessary scope of the business or are otherwise improperly applied to workers with no legitimate business interest at stake. For their part, state and local governments have taken the lead to address the issue.
Take, for example, Washington D.C.’s restrictions on the use of noncompetes. Originally, the D.C. Council proposed a blanket ban on all noncompete agreements – similar to the ban the FTC is proposing. However, after hearing from concerned parties, the final version which the council passed was much less restrictive. The Non-Compete Clarification Act of 2022 limits bans on noncompetes to exclude highly compensated individuals, defined as employees earning more than $150,000 a year, and provides various exceptions for certain specialists, like broadcast employees and healthcare professionals. The D.C. law also protects businesses by allowing for employee-employer contracts to prohibit an employee from using, selling, or disclosing an employer’s sensitive information in exchange for money or something of value.
In addition to the nation’s capital, 11 states have some sort of restriction on noncompete agreements. So far this year, 25 bills addressing noncompetes have been introduced in 17 state legislatures.
For the Federal Trade Commission to promulgate a rule of this nature it needs statutory authority to do so, but also has to make a compelling case that such a federal rule is necessary. The FTC’s proposed rule has failed on both accounts.