Earlier this year, the Federal Trade Commission (FTC) issued a plan to ban non-compete clauses. This proposal would allow workers to work for rival companies or start competing businesses immediately, but as expected, there is some heavy pushback from companies. This brings the prospect of legal action for companies claiming a valid and legitimate reason for non-compete clauses.
Why The FTC Wants The Ban
According to the Federal Trade Commission, about one in five American workers — approximately 30 million people — are bound by a non-compete clause, which prevents them from pursuing other opportunities. Decreased competition with non-compete clauses means that workers are paid a lower wage. In the FTC’s proposed rule change, it is written that non-compete clauses interfere with competitive environments in the labor markets, causing labor markets not to function properly.
The FTC has argued that non-compete clauses can limit competition by preventing workers from leaving their current employer to work for a competitor or start their own business. This, in turn, can reduce innovation, limit job mobility, and harm workers. The FTC has also expressed concerns about using non-compete clauses in low-wage industries, where workers may be unable to negotiate the terms of their employment contracts and may be restricted from seeking better job opportunities.
Before the proposed ban, only three states had wholly prohibited non-compete clauses. Other states have passed legislation restricting non-compete clauses in specific industries, such as low-wage workers and franchises.
What Opposition Says About The Ban
Opponents of a ban on non-compete clauses argue that such restrictions would harm businesses and limit their ability to protect their confidential information, trade secrets, and other valuable assets. They also say that non-compete clauses incentivize companies to invest in their employees’ development and offer higher salaries and benefits.
Opponents also say that non-compete clauses can also benefit workers as they can provide job security and help prevent unfair competition. They point out that workers can negotiate the terms of their non-compete agreements and that many freely choose to sign such agreements in exchange for additional compensation or other benefits.
Finally, the opponents of the proposed ban on non-compete clauses believe that it is not necessary or appropriate for the federal government to impose such a ban, as the use and enforceability of non-compete clauses are already regulated by state law and that a federal ban could preempt more flexible and nuanced state-by-state approaches.
Alternatives to Non-compete Clauses
If non-compete clauses are banned, companies may need to find alternative ways to protect their confidential information, trade secrets, and other valuable assets. Here are a few alternatives that companies may consider:
1. Confidentiality agreements: Companies can require employees to sign confidentiality agreements, which prohibit the disclosure of confidential information and trade secrets. Confidentiality agreements can be a valuable alternative to non-compete clauses as they protect a company’s proprietary information without restricting an employee’s ability to work for a competitor.
2. Trade secret protection: Companies can protect their trade secrets by restricting access to sensitive information, implementing secure storage and transmission systems, and conducting background checks on new hires.
3. Garden leave provisions: Companies can include “garden leave” provisions in employment contracts, which require employees to take a certain period off after leaving the company before they can begin working for a competitor. This can give the company time to find a replacement and prevent the former employee from immediately using confidential information for a competitor’s benefit.
4. Intellectual property agreements: Companies can require employees to assign any intellectual property they create while working for the company to the company. This can help ensure the company retains ownership of valuable inventions and innovations.
5. Key employee incentive programs: Companies can offer key employee incentive programs, which provide financial incentives for employees to stay with the company for a certain period after leaving. This can help mitigate the risk of employees taking confidential information to a competitor.
These are just a few alternatives that companies may consider if non-compete clauses are banned. The best approach will depend on the specific needs and circumstances of a given company and industry.
Despite the potential benefits, the FTC’s proposed ban on non-compete clauses has drawn fire from some business leaders who view such language as a necessary measure to protect trade secrets. Until there is more clarity on where the government will land – and how quickly it will get there – employers should continue to craft non-compete agreements that promote employee growth within an organization and do not inhibit an employee’s ability to advance in their career. When it comes to alternatives to non-compete clauses, CF Financial may be able to help. Please fill out our contact form if you have questions or need assistance with alternatives to non-compete clauses. We look forward to speaking with you soon.