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Earlier this year, I jumped for joy when I read about the Federal Trade Commission’s (FTC) proposed rule to ban non-competes. Over the course of my 26-year career in executive search, these mostly unenforceable and highly precarious documents have caused me more than a few sleepless nights. These seemingly ubiquitous non-compete clauses have reared their ugly head during some of our more high-profile searches. And I have attempted to recruit countless candidates for my clients who are eager to be considered for an opportunity but are regrettably stopped in their tracks because of a non-compete they vaguely recall signing when they were initially hired. If I am lucky, candidates remember signing said document, have a copy, and can discuss what it means practically speaking. These conversations are difficult, dispiriting, and have created unnecessary consternation!
There are so many issues to address here, and I will do my best to simplify the argument. Non-competes are a prohibition on workers taking jobs with competitors, or burgeoning enterprises. Experience tells me that the very worst part of this constraint is that it disallows workers from joining companies where they would be a much better fit. Restricting employees’ ability to easily change positions depresses productivity and it starts to really hurt firms because they can’t hire the workers that they want to hire, thereby stifling wage growth. This can also cause eventual declines in entrepreneurship, as new businesses are harder to form when access to talent is difficult. For those who do establish new organizations, it may be harder for them to hire and grow their business. There’s a whole range of effects—on entrepreneurship, innovation, employability, wage growth, and productivity—that arise from non-compete agreements.
The proposed FTC rule is not the first time non-competes have been challenged and it may be helpful to know that California; Washington, D.C.; North Dakota, and Oklahoma have banned them. Eleven other states bar them for certain workers, especially those making below an established hourly wage or annual salary. However, many contracts continue to include them, even in areas where they are restricted or banned. Even in these regions non-competes can still harm, as in many cases workers are not aware that these provisions are not enforceable. The FTC’s proposal would require employers to withdraw existing non-competes and tell workers that they no longer apply. Simply stated, it would be illegal for an employer to try to or to enter into a non-compete, or to suggest that a worker is bound by one. Covered workers would include: employees, independent contractors, interns, and volunteers, as well as any other worker, paid or unpaid.
Studies from the Social Science Review Network (SSRN) and Economic Policy Institute argue that non-competes hold down pay because it makes changing jobs harder; taking on a new role is one of the most common ways people obtain a raise. The issue of non-competes and their impact on wages for middle- and low-income workers deserves its own article and flies in the face of everything we are all trying to do around equity, inclusion, belonging, and access. I can unequivocally make the argument here that by banning non-compete agreements, we make labor markets more competitive. When you have a competitive labor market, it increases hiring, which will push up the quantity that firms produce, which will in turn push down prices. Competition is, in general, good for prices, it’s good for consumers, and it’s good for workers.
I like to provide a balanced perspective and thought about offering a few supporting words about the value of non-compete clauses but every argument I came up with lacked virtuous support or proof of concept. Good riddance to those irksome non-competes that have caused nothing but heartache for those negatively impacted by their antediluvian and entirely old-school limitations. And for those of you who will soon potentially be free from the encumbrances of a non-compete, congratulations!