FTC proposed rule would axe noncompete clauses. Is that a good idea?

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Workers would be able to change jobs more freely than they can now if the Federal Trade Commission succeeds in banning noncompete clauses. But opponents warn that freedom won’t be free.

Noncompete agreements, which the FTC says are signed by one-fifth of Americans as a condition of employment, block employees from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after a worker’s employment ends. The FTC argues that these agreements suppress wages and block innovation and entrepreneurship.

The FTC estimates its proposal to ban “noncompetes” could increase wages by nearly $300 billion a year and expand career opportunities for about 30 million Americans, but opponents are skeptical of these estimates. Most noncompetes aren’t even enforced now, they argue, and if they are, it’s primarily with highly paid workers who have access to secret information or client lists, not the average worker.

A ban “could really put a leash on the ease of sharing information from the corporate perspective,” said Maurice Cayer, distinguished lecturer, and coordinator of M.S. for Human Resources at the University of New Haven. “What that would do from an employee perspective is prevent them from having the information they need to be more innovative.”

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Who has noncompete agreements?

Noncompetes are most likely to be found in high-skill, high-paying jobs like in technology, pharmaceutical or manufacturing where breakthrough developments are important. They’re also prevalent in companies that fear poaching by clients, like financial firms, that may rely heavily on sales. In some of those industries, almost one-third of workers have noncompetes, according to a Minneapolis Federal Reserve report last year.

Among low- and moderate-income workers, more than one in ten reported having a noncompete contract, the Minneapolis Federal Reserve said.

Why does the FTC want to ban noncompetes?

They “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,” the FTC said. They also prevent people from sharing ideas and starting new businesses, which hurts innovation, it said.

Even if noncompetes are rarely enforced, “the mere threat of enforcement can limit their (workers’) negotiating power and career opportunities,” the Minneapolis Fed found.

Worse, if you’re one of the unlucky ones who gets sued, your life can turn upside down.

“People don’t really understand how disruptive signing non-compete agreements can be to your life until it happens to you,” said Joby George, director of product management at cloud computing company Veeva. “I joined my previous company just out of college and signed the paperwork without thinking I had a choice. Fourteen years later when I accepted a new job, our whole lives were in upheaval. When I resigned, I was walked out the door and served legal papers at my home in front of my wife and children. After almost a year of legal processes, the case was dismissed, finding that I had done nothing wrong.”

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What are some reasons to sto the ban?

Workers might find that they’ll receive less skill training and career development because companies won’t want to spend the money and time if employees leave, said Peter Glennon, New York business and employment litigation attorney and founder of Glennon Law Firm.

There may be less open sharing in the company of financials, marketing plans and business forecasting “because you don’t want that information to walk out the door with the employee. Yes, confidentiality agreements would still be permitted, but the employee has the knowledge and could use it to benefit a competitor without disclosing the information or otherwise violating a confidentiality agreement.”

Instead of helping less-skilled and low-wage employees, this could hurt them.

“Like the minimum wage increases appear to have accelerated the use of computers and apps and now even robots at fast food restaurants, and offshore outsourcing, companies may hire only experienced workers who developed on their own instead of hiring junior people and developing them,” Glennon said.

“Another con is that the pool of trained, qualified employees may shrink. Perhaps that drives more foreign outsourcing,” he added.

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Could the ban even become law?

“Zero percent chance, as it is,” Cayer said, noting though a diluted variation that maybe, more narrowly limits the effective time of a noncompete could pass.

For the next 60 days, the FTC is looking for the public to comment, and Cayer expects all industries will likely have a comment for the FTC. If the FTC goes ahead, the rule will go into effect 180 days after the final version is published.

But that process could be bogged down by politics and litigation. The U.S. Chamber of Commerce has already called the FTC’s plan “unlawful” and vowed to fight it.

“Since the agency’s creation over 100 years ago, Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule. The Chamber is confident that this unlawful action will not stand,” it said in a statement.

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FTC proposed rule would axe noncompete clauses. Is that a good idea?

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