If you have followed the news in recent months you may have heard about a proposed ban on non-compete clauses. It is true that the Federal Trade Commission (FTC) has proposed a new rule which would entirely outlaw non-compete clauses across all professions. This proposal has gained quite a lot of steam lately, showing up on social media and news outlets alike, but what would this mean, and what impact would it have on the modern workforce and legal landscape?
What is a Non-Compete Clause?
To really understand how a ban on non-competes would affect the workforce, you first need to understand what a non-compete clause is. A non-compete clause is a contractual clause that limits an employee’s ability to engage in a particular profession or job role by prohibiting them from working for competitors. These clauses give security to employers by making it difficult for employees to leave in order to take comparable jobs or work in similar roles with different companies. They also have a tendency to make it difficult for such employees to move upward in their careers, as they can stifle local job competition by preventing the employee from seeking out better jobs in the local market.
As such, non-compete clauses have come under heavy scrutiny from the public as well as the state and local governments of many jurisdictions. In fact, some jurisdictions such as California have already entirely outlawed non-compete clauses, at times imposing harsh penalties when a party seeks to enforce one. Even in jurisdictions where they’re permitted such as Virginia, non-competes are very heavily regulated, requiring close tailoring to geographic region, duration of time, and relatedness to protecting the employer’s business interests. This extent of this regulation frequently puts employers and employees at odds when determining things such as compensation and benefits.
Why Ban Non-Competes?
When considering a ban of non-compete clauses, it ultimately boils down to two schools of thought. The first is that of the employer that wants to ensure the retention of high-quality employees, and the second is that of the employee who wants to freely progress in his or her career. On the side of the employer, it makes sense that maintaining a highly qualified workforce would be a high priority. As such, preventing employees from jumping ship to work for competitors seems like an easy way to minimize employee turnover. Furthermore, the employer can usually accomplish this without incurring extra costs as the restriction on competition acts to reduce wage competition at the local level. From a purely business standpoint, it makes perfect sense for an employer to support reducing competition in this manner.
The flip side of this coin is the employee perspective. Most modern employees want the ability to move up in their careers, whether with their current employer or with a different employer. As such, non-compete clauses put a significant burden on the employee’s ability to advance. Effectively, by restricting an employee’s ability to work for a competitor, the employer forces its employees to choose between staying with the employer, relocating to a new geographic region, or risking significant liability. In recent years, those working in specialized professions such as medical practitioners and other service providers have frequently had to opt for lower wages or benefits in order to avoid needing to relocate or be sued. The employee’s perspective here aligns with the modern push for employee rights and well-being. As such, it makes sense why an employee would support the ban of non-compete clauses.
Effects of the Proposed Ban?
In the short term, it is increasingly likely that there will be legislative and even Constitutional challenges to the ban. Since the FTC has not yet approved the ban, states may enact their own legislation addressing non-competes. This legislation could result in additional restrictions at the state level, or it could do the opposite and attempt to loosen restrictions. Additionally, since the FTC is a federal agency, it will likely meet Constitutional challenges if it passes such a ban that invalidates state laws. These challenges would likely persist for at least the next few years before reaching any resolution.
In the long term, nothing will drastically change if the FTC strikes down the ban. This would likely continue the trend towards restricting non-competes at the state level, resulting in continued variance from state to state. On the contrary, if the ban is approved and survives Constitutional challenges, the landscape will change dramatically. Not only will employees be able to leverage competitive job opportunities for purposes of gaining higher pay, they can do so at the local level with no fear of liability. This means that if a competitor offers to pay the employee substantially more than the current employer to do the same job, there is almost nothing stopping the employee from leaving for the higher-paying job. Ultimately, this gives employees the flexibility and mobility they have been demanding in recent years.
In that same vein, however, if employers have to pay more in order to retain employees, it stands to reason that jobs may be less plentiful. If the employer can’t keep up with the increased salary demands, money that was previously being spent on other positions may need to be sacrificed in order to pay top employees competitive wages. It follows that the job market will then likely get much more competitive due to the reduction in available funds and positions. In this scenario, jobs would ultimately yield higher rates of compensation, but may also be more difficult to find.
Until the FTC reaches a final decision on the non-compete ban, it is difficult to predict exactly how things will play out. Until then, if you have questions about whether you are subject to a non-compete and whether it is enforceable, give us a call to schedule a meeting with one of our attorneys.
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