Executives Boo, Employees Cheer FTC Ban on Non-Competes

Reactions to the FTC’s ruling banning non-compete clauses in new and existing U.S. employment contracts differ greatly depending on whom you ask—executives or employees.

Employees are delighted, executives, not so much.

Most (45%) of the 205 HR professionals surveyed by the Institute for Corporate Productivity (i4cp) last week reported that while executives in their organizations view the ruling as a generally negative change, in contrast, employees (65%) view it as a positive.

As i4cp noted earlier, the ban does not take effect until 120 days after it has been published in the Federal Register. In the meantime, challenges to the ruling have already begun to roll in.

The upside of banning non-competes

The FTC ruling is being celebrated by organizations that have been stopped from hiring people due to existing non-compete clauses.

It also, of course, gives freedom of movement to job seekers previously thwarted from jumping to a rival company by existing non-compete agreements. And it could heat up competition for talent in terms of rising pay and expanded benefits offerings.

Some survey participants indicated that they anticipate a flurry of hiring and outreach planning to connect with  talent currently under strict non-compete restrictions.

“There are several talented individuals who want to join our team who have been restricted by non-compete agreements. We’ll likely be making some job offers to grow our team and help these folks get out of situations they no longer want to be in,” one survey participant wrote.

Another noted, “We will begin reaching out proactively to candidates who were previously under non-competes once this ruling goes into effect to actively recruit them to our organization.”

Survey participants said that the ban is perceived to help/significantly help their organizations’ ability to:

• (53%) Attract top talent
• (23%) Drive innovation
• (16%) Grow intellectual property
• (15%) Deliver value to customers
• (9%) Retain top talent

The perceived not-so-great impact of banning non-competes

Some industries will be more affected than others if and when the FTC ban goes into effect. Diminished ability to retain talent tops the list of anticipated impacts cited by survey respondents in terms of hindering/significantly hindering the ability of their organizations to achieve the following: 

• (42%) Retain top talent
• (26%) Grow intellectual property
• (19%) Drive innovation
• (11%) Deliver value to customers
• (3%) Attract top talent

And concern about how to best protect intellectual property (IP) and trade secrets is common.

There will be increased focus on data security to ensure IP protection and considerations such as how to best lock down customers lists, etc. Some plan to review their non-disclosure agreements to ensure they are solid.

As one survey participant noted: “In specialty retail, this is huge. Our employees have important information about specific products and services that would be detrimental to us if shared with our key competitors.”

Preparedness for the potential of the ruling varies

While the ban on non-competes has been under consideration by the U.S. Federal Trade Commission for quite some time, most survey respondents (51%) reported their organizations were only “somewhat prepared” for the ruling.

Fewer (22%) indicated that their companies have stayed on top of developments and were “very prepared,” 20% were got off guard, with no preparation, and 6% said their organizations were unaware of the ruling.

What organizations are doing (or not) in response to the ruling

Some organizations are taking immediate action, such as digging into the ruling to understand the implications and potential impacts and holding off on initiating new agreements. Others plan on a wait-and-see approach pending court challenges to the ruling, but are closely tracking proceedings that could delay or even reverse the ruling.

Other actions described in narrative responses of survey participants range from the practical to the strategic, including:

• Assessing what the path to compliance needs to look like.
• Reviewing and tightly monitoring use of related terms on contractual agreements.
• Consider how to use the Intellectual Property and Confidentiality Agreements going forward.
• We will modify our employment agreement template at the senior leader level where non-competes exist.
• Considering special compensation plans for key roles as a retention play.
• Redesigning our offer letters for grades where there are non-compete clauses.
• We are updating our employment agreement templates, executive exit packages, and separation agreements.
• Upskill and train our recruiters on the new ruling; it will be important that they also educate individuals they're recruiting, as some  may not know their non-compete is no longer binding, etc.
• Review existing agreements and determine if we should maintain through the transition period or adjust agreements in line with the new ban.
• Communicate our plans and actions to the organization starting with senior leadership.
• Reiterate that the various contractual clauses that protect our IP are essential to our competitive position in the market and the value we deliver to customers, as well as positive messaging related to our values, which are rooted in trust and integrity.
• We will still have new sales employees sign a non-disclosure and non-solicitation agreement (because what we really want is for them not to be able to share competitive information and not to solicit customers).

What the impact of voiding existing non-competes will be is of great concern and even angst for some leaders and what this might look like in terms of creating risk. But overall, there’s a sense that organizations will adjust and keep moving, albeit carefully, while waiting to see how the litigation plays out.

Actions such as revising employment contracts to focus on confidentiality, protection of trade secrets, and non-solicitation seem like the prudent thing to do at the moment.

As one participant wrote: 

We'll still work to grow intellectual property and drive innovation—we won't stop / can't stop growing those, but we need to think about how we can protect company insights and customer base going forward.