What Does the FTC Non-compete Ban Mean for Businesses and Workers?

In the last few years, non-compete agreements have again become a popular topic in the business world. These non-compete contracts, which stipulate how many months or years an ex-employee must wait before working for a competitor and sometimes even prevent ex-workers from opening up similar ventures until that time is over — have generated controversy about fairness, competition, and the movement of workers. In the spring of 2024, the Federal Trade Commission (FTC) proposed a first-of-its-kind rule that could reshape the landscape: a nationwide ban on non-compete agreements.

The implementation of this proposal, in turn, would have a significant impact on businesses and wages. Let’s do a deep dive into the FTC’s Non-compete Ban proposal, why it matters, and, by extension, what this plan might suggest about efforts to save American labor.

What are non-compete agreements?

A non-compete, as the name suggests, is a provision many employers have sought in employment agreements to limit what former employees can do after they leave- usually for some specified period of time — such as working with competitors or starting a similar business. Typically, employers often protect trade secrets and intellectual property, such as confidential information, with non-compete clauses to stave off employees from soliciting clients or poaching valuable talent.

Yet, increasingly, over the last several years, non-compete agreements have spread beyond executive and high-tech occupations. They have been used more and more frequently for lower-wage jobs — think restaurant workers, retail employees, or even positions that come right at the start of a career. Stable jobs are increasingly regarded as less fair and more of a block on labor mobility.

Non-compete clauses have become increasingly common and broad in their definition over the past few years, so it was no real surprise to see this reaction. What exactly do these proposed changes mean?

The FTC proposed a rule in Jan. 2024 that would prohibit non-compete agreements across the U.S., applying to both newly signed agreements as well as those already in force. The rule would:

1. Ban non-compete provisions in employee contracts.
2. Mandate that employers cancel previously agreed non-compete agreements and notify the workers — both past and present— of their nullification.
3. Increase job movement by allowing workers to move freely between companies and start their own businesses without legal penalty.

This principle extends to almost all industries and position levels with rare outliers. If enacted, this would be the first time that a federal-level intervention is used to circumscribe what states otherwise regulate.

Why Does the FTC Want to Ban this Stuff?

Non-compete agreements, the FTC argues in a letter to lawmakers, deny workers valuable opportunities to change jobs and suppress wages.

1. Restricting Job Mobility: They also argue that non-competes lock employees in low-paying jobs or industries instead of the best wages, benefits, and career advancements, no matter where those are to be found. Also, the fact that lower-earning jobs are hit by this should be no surprise if you cannot afford to fight a non-compete in court.
2. Suppressing Wages: Where job mobility is curtailed, however (thanks to a non-compete), this wage suppressant operates as intended. If the best workers can’t leave to work for a competitor who will pay them more, then there’s not much reason to give employees raises or promotions. The FTC report found that scrubbing non-competes from the economy could lead to workers earning up to $300 billion a year more, as companies would have no choice but to pay employees higher salaries to keep them from leaving for higher-paying jobs across town or around their network.
3. Limiting Innovation and Entrepreneurship: Non-competes prohibit former employees from even starting a business in unrelated fields. This hampers innovation and entrepreneurship. The logic behind the FTC’s recent campaign to ban non-competes is that they discourage entrepreneurship by preventing workers from leaving established firms and joining new ones.
4. Negative Impact on the Job Market: The ubiquity of non-compete clauses that stifle labor market competition is most acute in certain types of specialized roles. The use of non-competes can cripple the ability to hire, putting a drag on both business growth and innovation.

The proposed ban is intended to provide a fairer market for workers, create more competitive job markets, and boost economic growth through innovation and entrepreneurship.

How Might the Proposed Ban on Pre-Dispute Arbitration Agreements Impact Workers?

To most American workers, the FTC ban could be huge. Let’s explore what that might mean for workers in different sectors:

1. More Freedom to Explore New Jobs: Banning non-competes will allow employees more flexibility in seeking out better job opportunities without the fear of legal blowback. This is particularly important to workers in industries such as tech, healthcare, and professional services, where non-compete agreements are frequently used.
2. Higher Wages & Better Benefits: Giving employees the freedom to consider higher-paying positions will help ensure that companies offer competitive salaries and benefits. From an economic standpoint, a ban on non-competes will improve the quality of labor available at all companies- in theory, this should lead to more pay for everyone as firms have to work harder to keep top talent.
3. Excellent Opportunity for Businesses: Such a move would make it easier for employees to quit and launch their own startups or take jobs with fast-growing ventures without running into legal challenges from old bosses. This may also result in a wave of new businesses and incremental innovation through various industries.
4. Better Working Conditions: Given how more businesses are competing for talent, they might also have to rethink their working environment to attract and keep employees on board. This provides not only jobs with higher wages but perhaps safer working environments, more flexible work schedules, and a host of other employee-friendly policies.

What Do Employers Need to Know About the Ban?

While workers likely will welcome a ban on non-compete agreements, the proposal could present hurdles for businesses of particular interest to employers may be how it could affect them:

• Employees Reevaluating their Retention Methods: Getting rid of non-compete agreements means companies must rely on other methods to hold onto their top employees. It might mean spending more money on employee engagement, paying enough to keep your talent from being poached by competitors or building an inspiring company culture that promotes retention.
• Increased Salary Costs: Doing away with non-competes will additionally have the follow-on effect of increasing turnover in labor markets. Companies will need to reevaluate the salaries they pay their employees to be competitive and reduce turnover.
• Increased Competition for Qualified Talent: With more spending in highly specialized markets such as technology, healthcare, or engineering, employers can expect to feel the heat of a forsaking recruitment environment.
• Protecting Trade Secrets and Intellectual Properties: One of the most common purposes a company seeks to accomplish through non-compete agreements is protecting its intellectual property, trade secrets, and confidential information. If the FTC ban happens, companies will have to be more adamant about using NDAs and non-solicitation clauses, amongst other things, but that would not carry any weight here.
• Adapting to New Legal Requirements: If the prohibition comes into effect, an employer will have to analyze existing employment contracts and change them accordingly. This may include getting rid of existing non-competes and changing contracts for new hires.
• Employer Action: The most pertinent advice for employers is to be proactive in working with their legal teams ahead of time as regulatory changes occur.

What’s next for Non-competes?

The FTC has yet to finalize its proposed ban. The rule is now open to public comment and is certain to garner significant opposition from many industries and business organizations. Others contend that non-competes are critical to safeguarding trade secrets and encouraging innovation, particularly in an industry for which proprietary knowledge is central to preserving a competitive advantage.

Even so, if the prohibition is successful, it may lead to massive changes in the way U.S. businesses operate within this country. Companies will need to adjust their talent management strategies, and workers’ opportunities for development, mobility, and entrepreneurship could grow.

Conclusion

The FTC plan to end non-compete agreements could redefine how work happens in the US, opening all things up for workers and breaking down barriers that are currently stifling competition or innovation. Moving forward, non-competes are an issue that everyone involved in businesses should be paying attention to — and start making plans for. Despite the legal morass leading up to a change in tradition, businesses will have plenty of room to navigate this new frontier and flourish after non-competes are wiped out.