Ban could prompt employers to use alternative mechanisms such as nondisclosure agreements
By Lauren Weber
Jan. 17, 2023
Businesses and lawyers are beginning to assess what the Federal Trade Commission’s proposed ban of noncompete clauses in employment contracts could mean for worker mobility, wages and the way future compensation agreements are structured.
While a full or partial ban could expand the pool of potential hires, it also would weaken a tool that employers have come to rely on to retain talent and protect trade secrets and other proprietary information, lawyers say. More companies likely would turn to a patchwork of alternative mechanisms to keep people from leaving and taking valuable information with them, including nondisclosure agreements and employment contracts that reward longevity, they say.
“Employers have operated with an understanding that they can protect their interests through noncompetes,” said Matthew Durham, a Salt Lake City-based attorney with Dorsey & Whitney LLP who advises companies on employment matters. “What you’re seeing, reflected in the FTC proposal and elsewhere, is a growing hostility to the idea that there should be those kinds of restrictions, and it’s changing the environment that employers have been comfortable with in the last number of years.”
The FTC proposed a ban this month on nearly all noncompetes, saying that the clauses—which typically prohibit workers from moving to a new employer or starting new ventures of their own—hamper competition in the labor market, suppress wages and hold back innovation and entrepreneurship. The proposal came in response to an executive order from President Biden in 2021.
Businesses say they impose noncompete clauses on employees to protect trade secrets and other confidential information, including customer lists and financial data.
Mr. Durham and others say they believe the FTC may narrow its rule after hearing comments from the public, including employers and business organizations that have already signaled their opposition to the current proposal. The agency could, for example, allow noncompetes for highly compensated workers.
Noncompetes are common in employment contracts for senior employees like software engineers, sales representatives and top executives. Over time, they have been applied to many parts of the U.S. workforce, including some janitors, baristas, schoolteachers and entry-level workers. According to the FTC, one in five U.S. workers is currently subject to a noncompete clause.
Noncompetes are regulated at the state level, and many states have already taken action to limit use of the clauses by, in some cases, forbidding employers from imposing them on people earning under a particular wage threshold or for certain types of workers.
“The vast majority of people in America can’t afford a lawyer to defend a noncompete case,” said Jonathan Pollard, an attorney in Florida who represents workers whose employers are trying to enforce noncompete clauses. “Just the threat of enforcement is often enough to restrain talent in the labor market.”
Some states, such as California and Oklahoma, hold that the clauses are unenforceable in all or nearly all employment contracts.
A number of studies suggest noncompetes suppress wages and innovation. A review of Oregon’s 2008 ban on noncompetes for hourly workers found that wages rose an average of 2% to 3%. Another study, examining Hawaii’s 2015 ban on noncompete agreements for high-tech workers, found an 11% increase in job moves and a 4% increase in new-hire salaries.
The clauses restrain not just pay and entrepreneurship, but also professional development, workers and some attorneys say.