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How a Potential Non-Compete Clause Ban Stands to Impact Employers

Apr 7, 2023

The Federal Trade Commission (FTC) recently announced a proposed ban on non-compete clauses in employment contracts, which could significantly impact many industries. Since announcing the proposal in January, much discussion has been had about the ban's impact, with a recent vote taken to extend the public comment period until April 19. The implementation of this ban stands to have a drastic effect on how companies recruit and retain their most valuable employees.

What is a Non-compete Clause

Non-compete clauses are provisions in an employment contract that prohibit employees from working for a competing company for a certain period after leaving their current job. These clauses are common in many industries where companies may be concerned about their employees taking valuable trade secrets or confidential information to their competitors. The FTC's decision to ban non-compete clauses is a significant shift in policy. They have typically taken a more hands-off approach by allowing employers to include them in employment contracts as long as they did not violate anti-trust laws. However, the FTC now believes that non-compete clauses are too restrictive and constitute an unfair method of competition that may limit workers' job mobility and wage growth, violating Section 5 of the Federal Trade Commission Act.

Because of the high competitiveness in the labor market and with many companies vying for the same contracts and projects, non-compete clauses have often been a way for companies to protect their interests and prevent employees from taking valuable information to competitors. With the new ban, companies would be forced to find new ways to protect their trade secrets and confidential information.

Impacts of the Non-compete Ban

A potential impact of the ban on non-compete clauses is the potential for increased employee turnover. Without the threat of a non-compete clause, employees may be more likely to switch jobs and work for other companies — even competitors. Such increased turnover has the potential to create challenges for many companies, as they may be forced to spend additional time and resources on training new employees.

Additionally, employers could become hesitant to hire a potential employee who could possess their trade secrets, and already hard-to-fill roles could become even harder to fill, with the potential candidates for these jobs being spread even thinner amongst available companies looking to hire.

Potential Benefits of the Non-compete Ban

Though increased employee turnover in the industry could be viewed as a negative for many, it can potentially become a positive in the long run. Additional job mobility could lead to improved innovation and competition among companies. With employees moving more freely between companies, fresh new ideas and practices could be shared more readily, leading to a more dynamic and efficient workforce as a whole.

What Options Remain to Protect Trade Secrets?

One possible solution for protecting company trade secrets in the future would be for companies to focus on confidentiality agreements instead of non-compete clauses. A confidentiality agreement is a contract that requires an employee to keep certain information confidential, even after the employee leaves the company. These agreements are less restrictive than non-compete clauses and often still provide companies with some level of protection. Proponents of the FTC ban argue that confidentiality agreements can serve a similar function to the non-compete clause by still preventing employees from sharing sensitive information with competitors without the potential of limiting their job mobility.

While the FTC's ban on non-compete clauses could significantly impact companies, only time will tell how the new policy will shape the industry's future. If you have questions about how the FTC's proposed ban will impact your organization, contact your CRI advisor. They're up to date on all the recent developments affecting your business and are ready to help guide you and your organization through this potential transition.



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