Non-Compete Agreements Could Soon Be a Thing of the Past. What Are Their Pros and Cons?

Non-compete agreements could be an endangered species.

Lina Khan, chair of the Federal Trade Commission, made her thoughts on the controversial contract clauses crystal clear in an opinion piece published in The New York Times in January, saying they negatively impact wages and are an often insurmountable hurdle to innovation.

“In theory, noncompete clauses promote investment and innovation by assuring companies that their employees can’t run off with valuable secrets,” she wrote. "And, again in theory, workers should be paid more in exchange for agreeing to sign a contract that restricts their autonomy. But the reality looks very different.”

The FTC has proposed a ban on the clauses, in response to a 2021 executive order from President Biden. The agency is currently hearing comments from the public, including both companies and workers.

Roughly one in five workers are bound by a non-compete today, even in jobs that wouldn’t seem to need them, like fast food workers and security guards. And Khan argues that is a restriction of economic and individual liberty.

Non-compete agreements cover a wide range of conditions. Employers argue they protect the business, as high-level and critical employees have insight into company secrets and product details that are not public. As such, they’re necessary to protect intellectual property—and have the added bonus of encouraging employee retention.

Workers who do decide to leave can face restrictions that make it difficult to get another job for a period of time (sometimes years), unless they move to a different geographic region or move into a different industry altogether.

A 2020 study by the FTC and researchers from Duke and Ohio State Universities found that non-competes on the whole drive down worker wages, as employers (realizing these employees can’t leave) are less incentivized to offer competitive pay and benefits.

And when they do leave, many companies find that enforcing the non-compete is a costly endeavor, as it requires suing the former employee, who might ultimately be unable to pay the damages, meaning the business has wasted both time and money.

On top of all of this, Khan argued, non-competes harm innovation, which ultimately hurts both the companies and the economy.

“Start-ups are historically a key driver of job creation and innovation, but several studies have found that noncompetes reduce entrepreneurship and start-up formation,” she wrote. “How can a new business break into the market if all of the qualified workers are locked in? Or if the would-be founder is bound by a noncompete?”

Whether the FTC’s proposed ban on non-competes will go through is still up in the air. Many observers feel an outright ban could be narrowed, with the clause permitted for high-ranking executives or those who make high salaries.

States, meanwhile, have their own rules surrounding this issue. Some, like California and Oklahoma, have ruled that non-competes are not enforceable in virtually any circumstance.

Regardless of whether non-compete agreements survive in any shape or form, it won’t mean the end to protections for corporate secrets. Khan notes that other methods, such as non-disclosure agreements, trade secret laws and nonsolicitation agreements (which block former workers from poaching their old coworkers), will remain in place. But workers, the FTC says, should be free to opt for employment wherever they please, regardless of their current job.

“A thriving, dynamic economy depends on fair competition — not just for consumers, but also for workers," writes Khan. "We should be skeptical of any methods designed to prevent it."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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