On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that would ban post-termination non-compete clauses and require employers to rescind existing ones.
The FTC argues that non-compete clauses — which impede an individual’s ability to enter into or start a similar profession or trade — stifle worker mobility and wage growth. The ruling would essentially render existing and future agreements non-enforceable, subject to a narrow exception for owners or partners of a business.
The proposed rule would supersede all contrary state laws and apply to any covenant limiting an individual’s right to work. Consequently, overly-broad non-disclosure clauses and provisions restricting engagement with particular clients or service areas could also be considered illegal if they effectively shut down a worker’s ability to seek employment elsewhere.
How Companies Can Respond
Because non-compete agreements are frequently used to limit the movement of executives between competing businesses, they have historically acted as a retention mechanism. For companies — including our clients — that makes it an excellent time to examine whether candidates are being offered a competitive retention package. In addition, alternative strategies can also help to recruit and retain talent.
Retention bonuses can incentivize remaining within the company or a particular position. Performance bonuses tied to ambitious but attainable goals can be used to reward workers who meet long-term targets. Equity incentives, such as restricted stock and cash deferred bonuses, can give workers a tangible stake in a company’s success, as can expanding equity compensation to key personnel beyond the C-suite.
The renewed focus on retention means that company culture is more relevant than ever. Creating a supportive environment and providing opportunities for training, mentorship and growth can significantly impact where people choose to work and how long they stay.
Lastly, companies using non-disclosure clauses should proceed with caution. Businesses need to protect their proprietary information. However, they must ensure their language is in line with the FTC’s recent pronouncements.
Expanding the Talent Pool
While hiring managers will need to be mindful of binding contracts, the ruling could present a recruitment upside. As companies move away from non-competes — or as existing agreements are voided — executives may feel empowered to contemplate roles with adjacent firms.
The news is particularly good for individuals looking for employment opportunities. Research has shown that workers in areas where non-competes are banned enjoy significant benefits, including a boost in wages and job mobility.
Candidates bound by non-compete agreements often avoid exploring opportunities in their field until their term expires. This can leave them feeling trapped in their roles or limited to looking for positions outside their current vertical.
Should the FTC’s proposed ruling take effect, most existing non-competes will be much harder to enforce. As a result, job seekers may be free to move about among potential competitors. New hires may also have increased leverage to secure incentives such as performance bonuses or equity during negotiations.
The Road Ahead
There is a long road ahead before the proposed rule would take effect. As of today (February 2023), the FTC has not taken legal action to realize its position. Even if the ruling is finalized, it is likely to be challenged in court cases that could take years to resolve. For now, any established agreements are binding, and many businesses continue to enact non-compete clauses.
Nonetheless, companies can anticipate an uphill battle in enforcing current agreements regardless of if — or when — the ruling becomes law. The day before its announcement, the FTC filed complaints and obtained consent agreements against three companies forcing them to drop restrictions imposed on thousands of workers.
The FTC has sent a clear message on its stance on non-competes. Businesses should be proactive in preparing for possible change.
Search as the Foundation of Retention
At Townsend Search Group, our team is committed to delivering executive search journeys that prove fruitful long after an individual is placed. We design our process to promote longevity and frequently advise on retention tactics. We know that the best-case scenario for the client and the candidate is to identify the right person for the right role — and retain them for years to come.
While there is much to resolve as the FTC finalizes its stance, the proposed ruling represents a significant shift in the perception and enforceability of non-competes.
As the FTC solidifies its position, we will be working with our clients to shape strategies that respond to this new environment. In the coming months, companies will likely need to re-evaluate how they harness their resources to meet retention goals. On the other hand, they may find that their pool of prospective hires is considerably larger.
Clients and candidates are navigating a new set of conditions. With the right tools in place, companies can adapt and thrive, leveraging opportunities to reach additional recruits while continuing to prioritize sustainable hiring practices.
