FTC’s Proposed Noncompete Ban: Good for Workers, Bad for Businesses?

Do you work under a noncompete clause? The Federal Trade Commission wants to get you out of it – but would banning such clauses backfire, harming businesses as a consequence of freeing up workers?

The FTC proposed the ban earlier this month, estimating in its announcement that banning noncompete agreements could drive up wages and salaries by a total of up to $300 billion.

A federal ban wouldn’t be the first in the country, either. California law, for example, already prohibits the enforcement of noncompete clauses within the state – no matter where a company is headquartered – with the possible exception of trade secrets.

North Dakota and Oklahoma don’t allow noncompete clauses at all, and a number of other states provide exemptions, some based on income and some based on profession – everything from physicians, broadcasters and attorneys to security guards, automotive salespeople and recent cosmetology school graduates.

On the surface, a noncompete ban seems to cover multiple bases: increased compensation, greater competition and general fairness.

Why shouldn’t people be able to decide where they want to work, and what work they want to do based on their skills, talents, education and experience? Why shouldn’t they be able to change companies for a better salary or wage rate? Why should they have to uproot themselves – especially if they have families who are happy with where they are – and move to a different market just so they can keep working in their chosen fields?

The issue is more complex than that, though.

Business perspective: Some things must be protected

Brad Holliday, SkillPath’s Vice President of Human Resources, weighs in with his thoughts, using sales professionals as an example:

“While the internet has created some unique new methods for driving sales of certain products or services which have eliminated the need for a human interaction (i.e., a sales representative), I believe this is the exception and not the rule. Most sales of any magnitude today still require a sales professional to be involved somewhere in the process. This is, of course, where the noncompete comes into play.”

Selling, Holliday says, is more than just calling customers and trying to persuade them to buy a good or service.

“Doing so, there are marketing efforts,” he says. “where is the product or service advertised? How is it advertised? An argument may successfully be made that some of this information is confidential and proprietary to that company.”

The same, he says, goes for such things as customer lists, sales process and territory assignments: “This entire process is required for the success of the company; the company has a legitimate business interest to protect.”

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And while he disputes the FTC’s contentions that noncompete clauses hold down wages and salaries to the tune of $300 billion per year and are responsible for higher costs in health care, Holliday says that businesses have no one to blame for the FTC’s move but themselves.

“CEOs, CFOs, CSOs, and CHROs or their equivalent roles in too many organizations have been pushing the envelope for too long, almost as though we’ve been trying to see just how far we as the employer can go in the protection of our legitimate intellectual property, customer lists, etc.,” he says. “Many of us expected the issue to come to a head with an action brought by the National Labor Relations Board, or even by one of the larger unions, directly, like the Service Employees International Union.”

Pushback from businesses is inevitable

It’s important to remember, in the end, that these are still early days. Federal regulators – as recently demonstrated by the proposed gas stove ban, which was quickly walked back after a firestorm of backlash from both public and private sectors – aren’t above shooting down their own trial balloons or just letting them drift aimlessly away.

Employers won’t let this action go unopposed, either. Employers, managers and HR organizations are already ramping up into pushback mode.

“At the end of the day, while noncompetes have become very challenging to work with, they still serve a vital function in the protection of a company’s customer base from purely predatory behaviors,” Holliday says. “The way experienced HR professionals and employment attorneys craft noncompete agreements today truly invalidates this purported argument around worker mobility and wage reduction.”

If there are to be restrictions on noncompetes, he says, those should be implemented – as they are now – at the state level.

“There are sufficient laws in place today with the states,” he says. “Leave the states to enforce those laws.”

That may well be what happens, with decisions to pursue a federal ban – or drop it – based on any number of factors: the economy, legal challenges or a shift in policy direction. But for now, it’s the current hot topic in the HR world.

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