Noncompete clauses get the ax on Wall Street: Is Main Street USA next?

Companies’ ability to restrict an exiting employee’s job opportunities is in danger. A federal rule is already in the works to eliminate noncompete clauses in workers’ contracts. And there’s pressure growing from states to end the practice.

Case in point: New York state legislators just sent a bill that bans noncompete clauses to Governor Kathy Hochuli. Democrats crafted the bill and Hochuli is likely to sign it.

New York’s law takes it easy on businesses in a couple of ways: Confidentiality agreements are still allowed and companies can insist on non-solicitation deals to prevent outgoing workers from potentially poaching company clients. Employers lobbied for keeping those measures to protect proprietary data or “trade secrets.”

Employees in the Empire State currently working under noncompete clauses are out of luck. The bill prohibits future use of noncompete clauses, not current restrictions. That goes for typical one-year restrictions on who an ex-employee can work for, as well as shorter clauses.

“Noncompete agreements are bad for workers, bad for consumers, and bad for the economy,” says New York state senator Sean Ryan. “[The law] will also create a lasting positive impact on our state’s job market, allowing businesses to hire the best candidates for vacant positions.”

Anywhere from a quarter to 40% of employees (somewhere in the neighborhood of 30 million people) are working under noncompete agreements with their employers, depending on which source you want to believe. Many employers won’t hesitate to sue if a departing worker goes to work for a company in the same field.

New York joins California, Oklahoma and North Dakota in banning noncompete clauses in their states. California’s provision prohibits any contract that restricts an individual from “engaging in a lawful profession, trade, or business.”

Feds are all-in on employee mobility

The Federal Trade Commission (FTC) proposed to ban noncompete clauses earlier this year.

Industry groups and Wall Street lobbied the FTC to narrow the rule and eliminate high-paid employees. The passage of New York’s law is liable to make FTC regulators and agency chief Lina Khan less than sympathetic to these pleas. Republicans in Congress are less responsive to Wall Street and corporations so the rule is likely a done deal.

Finance is one of the top, arguably No. 1, sector where noncompetes are implemented. Many CFOs view noncompetes as a necessary tool to retain talent.