The U.S. Federal Trade Commission (FTC) recently banned noncompete agreements, which are contracts preventing employees from working at competing firms. The decision could have a substantial effect on workers and employers if officially accepted. While the rule is being legally challenged, the workforce could be in for a world of change.
What are noncompete agreements?
Noncompete agreements "restrict a worker's ability to switch employers within their industry," said The Washington Post. Employers have used them for decades, with approximately 20% of workers in the U.S. under noncompete agreements across a variety of leadership levels and industries. "These contracts and noncompetes were developed in the first place to prevent employees from easily switching to rival firms, or to new positions," Michelle Hay, the global chief people officer at Sedgwick, said to The Post.
The agreements have long been controversial. Employers claim noncompetes protect company information; workers claim noncompetes trap employees in their current jobs. In a decision that could have massive economic repercussions, the FTC voted to ban both current and future noncompete agreements. "The existing legal frameworks governing noncompete clauses … allow serious anticompetitive harm to labor, product and service markets to go unchecked," the Commission said in its decision. "The use of a large number of noncompete clauses across a labor market markedly affects the opportunities of all workers in that market, not just those with noncompete clauses."
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Essentially, the FTC posits that removing noncompete agreements will boost competition for labor and increase the creation of new businesses. The decision is part of a broader plan by the Biden administration to enact stronger antitrust laws. The FTC's rule is being challenged in court and may take several months to go into effect, if accepted. "Regardless of the size or sector, businesses must be ready to comply with the rule if it survives legal challenge," Roger Feight, an employment attorney, said to Yahoo Finance.
How will the FTC decision affect workers?
The FTC's rule would allow workers to "pursue better opportunities, shake up the market and push megacorporations towards fair practices," Liz Zelnick, the director of the economic security and corporate power program at Accountable US, said to the Post. That means workers would be free to explore other employment opportunities without restrictions by their current employer. This would create an environment with more competitive wages and benefits. The rule would affect approximately 30 million Americans, including those under existing noncompete agreements.
There are a limited number of exceptions to the rule. Noncompete agreements that were "already reached with company CEOs, presidents and senior business executives who have 'policy-making' authority and are paid more than $152,000 per year," will hold, but new agreements cannot be made, said Yahoo Finance. Also, "some banks, certain nonprofits such as health care providers, and stockyards will not have to comply."
How will the FTC decision affect employers?
Employers, other than those who are exempt, will no longer be able to enforce noncompete agreements or issue new ones. This could potentially lead to a shift in the workforce, as well as a rise in competition. Employers are also more likely to require their employees to sign nondisclosure agreements, prohibiting the spreading of sensitive information as a measure to protect intellectual property. "Companies that focus on creativity and keeping their employees engaged will thrive in this new era of mobility," said Forbes.
