In January, the Federal Trade Commission announced a proposal that, if successful, would represent a seismic shift in the way business is conducted across a variety of sectors: abolishing noncompetes. The practice of contractually protecting specific corporate interests, which has existed in some form for hundreds of years, is likely to come under more scrutiny over the next few weeks and months than ever before.
What could all that wrangling mean for employees (specifically contractors), and how might it affect employers – particularly their bottom lines? We’ll know more after the FTC closes the public comment period March 10, but any subsequent decision will likely be met with opposition from employers and business groups. The final word on the subject may yet be a long way off, but here’s a quick primer on how a ban on noncompete clauses could be expected to affect employers and employees – and possibly even stimulate the market for independent contractors.
Business as Usual for Employers?
There are legitimate reasons businesses can point to for pushing back on a the potential of abolishing noncompetes. The hiring clauses help insulate companies from the widespread sharing of trade secrets and proprietary information that could unfairly benefit competing organizations. The argument for noncompetes, which often prevent employees from working for or consulting with a company’s competitors for a prescribed length of time, can be compared to the spirit behind the pharmaceutical industry’s intellectual property protections: “The patent system,” according to PhRMA, “strikes a balance between promoting innovation and affordability for patients who rely on new treatments, improvements and cures.”
Noncompetes help safeguard the profit motivation, ensuring that businesses aren’t investing in new technologies, initiatives and employee growth simply to see their hard-earned gains passed on to business rivals. Companies that make sound decisions and smart investments, reasonable minds would surely agree, deserve to be rewarded for their efforts.
However, the FTC argues that noncompetes actually hinder innovation and notes that employers “have other ways to protect trade secrets and other valuable investments that are significantly less harmful to workers and consumers.” At least one labor law opinion asserts that restrictive covenants can and should be written more narrowly: “The restrictions themselves should be no broader than necessary to protect those legitimate interests, and they must be reasonable in terms of duration, geography and scope of activities prohibited.”
And after all, employee movement flows both ways. Over time, shared knowledge feeds corporate innovation that tends to be a tide that lifts all ships. Abolishing noncompetes ultimately could boost rather than curb business.
More Freedom for Employees and Contractors
Employees understandably disagree with the current deployment of noncompete clauses. No small amount of anecdotal and empirical evidence indicates that noncompetes suppress wages and professional development, handcuff employee mobility and make it difficult for workers to render services to multiple companies over a relatively short period of time – an especially problematic sticking point for contractors. The FTC estimates that a ban on current noncompete practices “could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.”
Even those on the employer side agree that a noncompetes ban would prompt organizations to become more creative in retaining talent, leading to juicier compensation for permanent employees while ensuring less restrictive movement between assignments for contract employees.
Whether noncompetes stay or go isn’t an issue that’s likely to be resolved soon. But in the meantime, a more focused, transparent approach to noncompetes could help both sides find a common ground that would benefit all parties.
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