At the heart of a healthy economy lies active competition, the pursuit of innovation, and opportunities for success. In the U.S., such an environment is supposed to exist, offering each a potential to shine. For many workers, barriers stand in the way, and one of the most common is the non-compete clause. Employers routinely use this clause to create unfair competition practices by holding power over their employees. This is nothing new and has been practiced by firms for decades. Good intentions to safeguard trade secrets and keep top talent lie at the heart of these practices. But these soon may be things of the past if the Federal Trade Commission rules against them. The FTC’s non-compete clause rule is expected to be announced in April of this year.
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In recent years, the FTC has targeted specific cases where companies have leveraged non-compete clauses against workers. These cases, and the unfair competition practices associated with them are behind the FTC’s new noncompete clause rule. And this could have major impacts not only on employers and employees but on the overall economy as well. The changes that could result from such a rule affect wages, startups, and labor markets. Ultimately, this will also have notable effects on consumers and the marketplace according to the FTC. After a year of debating the outcome and collecting public comments, many are awaiting the verdict in the coming months. If the non-compete clause rule is adopted, expect a new era of competition to arrive.
Examining Non-Compete Clauses in Detail
There’s no question non-compete clauses are common. According to reports, one in 5 workers are bound by such a clause in their employment agreement. At the same time, an amazing 98% of executives and managers sign non-compete agreements at the time of hire. While intentions may be worthy, the end-result of these practices do not seem to be. In essence, non-compete clauses are tools companies use to leverage their power over their workers. Studies demonstrate that these clauses reduce wages anywhere from 3 to 14% on average. This occurs because workers are not necessarily able to seek a better paying job elsewhere in a competitive form. Or they may choose not to pursue their own small business as well. This is one of the ways such clauses create unfair competition practices.
This is not the only way by which these clauses result in unfair competition practices. In addition to wage effects, employees will be less inclined to share new ideas with an employer. They also prevent other firms from gaining access to labor talent because of the inherent threats. With job mobility reduced, a market overall becomes less dynamic and innovative. Thus, while the immediate effects of non-compete clauses affect workers and firms, consumers are also impacted. They enjoy fewer products, reduced creative innovations, and even higher prices as competition is stymied. These are the motivations behind the FTC’s potential move related to its non-compete clause rule.
Predicting the Outcome of the FTC’s Announcement
In January of 2023, the FTC announced it would be exploring a non-compete clause rule. In justifying these pursuits, it stated that non-competes suppressed wages by some $300 billion annually among workers. At the same time, it also believed passing such a rule with provide 30 million in new career opportunities for Americans. Given this, the new non-compete clause rule considered would apply to all independent contractors as well as paid and non-paid workers. It would also require all existing non-compete clauses to be voided with proper notifications to workers by employers. The initial vote by the FTC board resulted in a 3-to-1 approval to proceed with examination of such a rule. Citing its unfair competition practices, non-compete clause considerations were then opened to public debate through April of 2023.
There is certainly some degree of support for the non-compete clause rule based on recent state legislative actions. Several have already passed such rules citing unfair competition practices as well. Specifically, states with such laws in place include Colorado, North Dakota, Minnesota, Oklahoma, and California. Based on this and the FTC board’s initial vote, it’s quite likely some version of the rule will move forward. Adjustments may be made based on the public’s discourse. And certainly, employer inputs were a part of these. But given the underlying motivation to promote competition and innovation, the chances of adoption are good. As a result, it will be important for businesses to develop new strategies.
Embracing Dynamic Innovation
In the spirit of dynamic innovation underlying the possible FTC’s non-compete clause rule, businesses may want to consider some strategies. In considering this, it’s important to understand the underlying intentions in dealing with employees. If protecting trade secrets is the goal, then pursuing patents would be a better approach. In fact, in the states listed above, patent failing rates increased after passage of these laws. Alternatively, businesses may ask for employees to sign confidentiality agreements so as not to share secrets. These types of arrangements can accomplish similar goals but without invoking unfair competition practices. This could result in a much better arrangement with workers in advancing the business without revealing the firm’s existing advantages.
Protecting trade secrets are not always the key motivation with it comes to non-compete clauses. Sometimes, firms look to protect valued employees and keep them from the competition. They may also fear they might start their own business. But in these instances, a better approach might be to cultivate loyalty from the beginning. This requires a professional environment where mission, vision, and values are well-communicated and demonstrated. Likewise, a positive and happy work environment can further these efforts. The FTC’s non-compete clause rule would support this type of approach as a valued labor market strategy. Over the long term, such a strategy will likely yield positive dividends even more so than non-compete clause deterrence. These and other approaches will be things companies may soon need to consider should the FTC bring about the anticipated change.
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