What HR leaders, recruiters, employers need to know about FTC noncompete ban
It’s open season on senior talent, thanks to the Federal Trade Commission’s ban on noncompete agreements, announced earlier this week.
The ban was met with applause from pro-labor groups but swiftly criticized by business interests that filed lawsuits shortly after.
That’s because the decision could have major implications for recruiters, employers, and some of their employees. It could spur an incredibly hot war for top talent with fewer barriers restricting high-level staff from job hopping over to competitors, experts say, but also could drive employees to take what they’ve learned to start their own competing firms or to work for a competitor.
“If you can start effectively buying your competitors’ client relationships by poaching candidates that otherwise would have previously been unable to come over to you, we could see a really hot war happening between companies trying to buy each other’s people up to take trade secrets and customers away from each other,” said Andy Challenger, senior vp at global outplacement and career transitioning firm Challenger, Gray and Christmas.
Noncompete clauses are traditionally signed in employment contracts and restrict staff from working at competing employers within a certain time frame and certain geographic area after leaving their current role. Companies use them to protect and preserve their own trade secrets and client relationships. But the FTC commissioners who voted to ban those clauses said they are exploitative, suppress wages, limit career mobility and hamper the creation of new businesses.
They cover workers in a variety of industries and roles, ranging from CEOs to fast food workers who have previously been prohibited from making sandwiches at another chain down the street. About half of private-sector businesses in the U.S. require at least some employees to enter noncompete agreements, according to a 2019 study from the Economic Policy Institute.
What employers need to know
A key group that will be impacted by this are executives or those in the C-suite, many of whom sign noncompete clauses when hired by their employers. The FTC defines senior executives as those who earn more than $151,164 annually and are in a “policy-making position.”
Senior executives will still be bound by those they’ve already signed under the rule, but won’t be forced into signing them again at their next employer. For other employees, existing noncompetes are not enforceable under the rule. That means employees in a variety of roles and industries will have a much easier time leaving a current employer and getting employed elsewhere, and potentially bringing knowledge of their previous employers’ proprietary information with them.
Employers may still be able to protect their client relationships through non-solicitation agreements, which are still allowed under the rule. Those clauses prohibit former employees from soliciting clients and customers from a previous employer.
“So that still allows employers some level of protection against defection of high-level employees,” said Mark Kluger, partner at employment law firm Kluger Healey.
But still, the decision could also have a chilling effect regarding the extent to which large corporations are willing to spread proprietary information at the top level, he said.
And giving high-level staff more freedom to move around also poses a threat to existing businesses and their lower level employees, he said. “If top executives defect from one entity to another, and the entity from which they’re defecting loses substantial amounts of business, lots of people get laid off,” he said.
What HR needs to know
Those in HR should be paying greater attention to the tools they do still have to protect company secrets, like non-solicitation clauses, but also intellectual property clauses and confidentiality agreements in employment contracts, said Carly Holm, founder and CEO of Humani, a human resources consulting agency.
Intellectual property clauses seek to protect trade secrets and proprietary information. She works with some companies in the tech and biotech spaces, where protecting that information is paramount.
“While they can go compete, they absolutely cannot take the IP from their company and bring it to another company, so ensuring that they’re not doing that [will be key],” she said.
For staff who leave, especially those at higher levels, HR needs to make them aware of their post-employment obligations to ensure staff themselves are aware of the agreements they are currently bound to.
The decision could also impact talent and retention strategies for those in HR as they won’t have a crutch to keep staff loyal.
“While this clause may make people jump more often, what I talk about a lot in my work, being HR, is how do we make people stay?” Holm said. They’ll have to pay more attention to the total employee experience from benefits and flexibility to overall company culture, and mitigate reasons for employees to jump ship, she said.
What recruiters need to know
This decision could impact recruiters by ultimately making it easier to place candidates. Arun Jolly, a recruiter and founder of Fulton River Partners, said he hasn’t been able to place at least a dozen candidates he can think of recently due to noncompete clauses in their original contracts. He works primarily with manufacturing companies and candidates in business development and engineering roles. He said candidates often aren’t even aware they signed noncompete agreements with their previous employer.
But once they do it slows the whole process down and often even stops it altogether. “The new employer doesn’t necessarily really want to get involved with any potential lawsuit or pay the legal fees for the candidate, so it just gets messy and everyone loses interest,” Jolly said.
“There are some companies that you just know that you can’t contact because it’s like everyone has a noncompete. It’s just going to be kind of fruitless to even bother trying to poach anybody out of a certain company. So hopefully this will ease that burden,” Jolly said.
But Jolly remains skeptical about the decision becoming final in its current form amid backlash and lawsuits being filed by business groups. The U.S. The Chamber of Commerce is leading the court challenge now after filing a suit and other groups have joined, like the Businesses Roundtable, an organization representing C-suite executives at major U.S. employers. The rule has a 120-day waiting period before it goes into effect.
“The likelihood of immediate change and implementation is pretty low, but it doesn’t mean that you shouldn’t be taking steps to be prepared for changes,” said Peter Rahbar, an employment attorney at the Rahbar Group.