Noncompete clauses could be a thing of the past: A quick look at the FTC’s proposed rule

The Federal Trade Commission (FTC) is proposing to ban noncompete clauses in employment contracts, long used by companies to prevent highly-valued employees from quitting and joining a competing firm.

Bottom line: While it’s great news for talented professionals with options and experience in fields like finance, the reg poses a daunting challenge for businesses looking to retain their competitive edge.

What’s the impetus for the change?

You may be surprised by how many companies rely on noncompete clauses. (It surprised us.)

“About one in five American workers – approximately 30 million people – are bound by a non-compete clause (NCC) and are thus restricted from pursuing better employment opportunities,” says the FTC. “Because NCCs prevent workers from leaving jobs and decrease competition for workers, they lower wages … [and] also prevent new businesses from forming, stifling entrepreneurship, and prevent novel innovation which would otherwise occur.”

The proposed rule’s liable to appeal to many voters struggling with inflation and lawmakers on both sides of the aisle. The FTC estimates that eliminating NCCs “would increase American workers’ earnings between $250 billion and $296 billion per year.”

The FTC will take comments on the rule change until March 10. Click here to read it.

Businesses will need to change gears

Fact of the matter is, not all good employees express any dissatisfaction with their jobs, pay, commute or other issues. Some aren’t even disgruntled to start with. They hear about an opportunity and jump at it.

Without the advantage of an NCC, employers will need to be more creative to keep performers on board (and hopefully happy). Keeping customer lists, trade secrets and financial data are equally important if not more so.

Having employees sign nondisclosure agreements to keep them from dishing the dirt about their former employers is one option some firms will explore. A more competitive benefits package and bonuses can’t hurt.

So far employers and Wall Street are asking the FTC to narrow the rule and eliminate high-paid employees. We’ll see if the FTC waters its rule down in time.