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What Business Leaders Need to Know About the FTC Ruling on Banning Noncompetes

Contributors: Drake Jaglowski

Last week, the Federal Trade Commission (FTC) voted 3-2 in favor of banning noncompete agreements for many U.S. workers. This ruling acts retroactively, nullifying previously signed noncompetes and restricting their inclusion in future employment agreements. Clarkston’s initial view of this ruling is one of cautious optimism, as we recognize the benefits for workers as well as the challenges it may create for employers. In this article, we outline what firms need to know about the FTC ruling on banning noncompetes, exploring how this decision standardizes labor policies at the federal level, which many companies already comply with due to state laws. We also examine how this rule change will drive companies to compete for employees, increase wages, lower healthcare costs, and encourage more flexible work policies. Lastly, we consider how this policy shift will impact employers and the measures organizations should take to retain a competitive advantage in the shifting business landscape 

Impact on Employees 

Employee Empowerment 

This decision aligns with state-level actions banning non-competes or limiting their scope in states such as California, Minnesota, Oklahoma, and New York among many others. The FTC decision also follows a broader trend of employee empowerment and fair competition, exemplified through the resurgence of unionization efforts seen in recent years. This rule change is likely to create a more dynamic and innovative marketplace in which employees gain the freedom to more readily contribute their skills and ideas across different organizations.  

Increased Wages 

As a benefit to employees, this change may also foster wage increases and more attractive employment terms as companies compete in the free market to attract and retain talent. The FTC estimates that this rule change could increase wages by $400-488B, an increase of $524 annually for the average worker. It is additionally projected to save employees $74-194B in healthcare costs over the same period.  

Rise in Remote Work 

In addition to wages, another area in which we could see a shift is in remote work opportunities. In the years following COVID, many employers across industries have pushed for a return to office, some even announcing pay cuts for employees who continued working remotely. To remain competitive in the market, and to attract and retain top performers, companies encouraging in-person work may reconsider their policies.  

It should also be noted that this new rule does NOT apply to “senior executives” (whose salaries exceed $151,164 per year who are in a “policy-making position”). The presumption for this being that their bargaining power is greater than that of the average employee, and their contracts are more thoroughly negotiated.   

Challenges for Employers 

While this rule change will benefit employees in many ways, we also acknowledge the challenges it will pose for business leaders in maintaining a competitive advantage. Many firms are concerned that this rule change will hinder their ability to protect their intellectual property. While 95% of employees previously bound by noncompetes are also bound by Non-Disclosure Agreements (NDAs), we anticipate a greater reliance on robust NDAs. Trade secrets are also a well-established way to offer protection should employees join competitors, though we still expect to see firms implement additional safeguards around their trade secrets and other IP.   

Next Steps for Company Leaders 

It’s important to note that this rule change is already facing several legal challenges from pro-business groups including the Chamber of Commerce. Several rounds of judicial review and appeals will take place over the coming years before a final ruling is rendered. Additionally, the rule change is likely to be stayed, offering temporary relief while the cases are adjudicated.  

Despite the legal hurdles this FTC ruling will face, we recommend that companies continually evaluate their people and compensation strategies, including their work environments and employee benefits. These measures will help build rapport with employees and ensure the retention of top talent. Such initiatives, however, could impact selling, general, and administrative (SG&A) costs for firms and place additional stress on profit margins, compounding inflationary pressures. 

In the potential absence of non-compete agreements, firms should also consider developing new safeguards to protect their intellectual property, a key concern should employees switch firms. The use of robust NDAs is one such measure to protect company assets and retain a competitive advantage.  

Final Thoughts: FTC Ruling on Banning Noncompetes 

Reversal of the rule change is not guaranteed, and resolution will not come for years. Accordingly, we recommend that business leaders begin revisiting their people strategies to retain high performers, but rolling out immediate and sweeping strategy changes would be premature. Remaining competitive both in the job and business market requires continual evaluation of current practices. Firms who do so will possess a distinct advantage over those who continue to embrace past strategies.  

For further insights into forming strategies for a changing landscape, reach out to our strategy experts. 

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Tags: Strategic Innovation, Change Management