A Noncompete Clause Ban Is on the Table—Here’s What Employees Should Know

SOnline23 August WebEx A Noncompete Clause Ban Is On The Table—Heres What Employees Should Know

When Sara Davenport realized her workplace was making her miserable and taking a toll on her mental health, she faced a difficult dilemma. The then-TV anchor couldn’t just swap one TV station for another; rather, a strict noncompete clause limited her career choices. To continue pursuing her dream job, Davenport needed to stop working for an entire year to remain in the Houston market or she would be forced to once again uproot her family, including four school-aged children, to take a job in a different area.

Davenport recalls feeling trapped as she struggled to figure out how to navigate this crossroads in her career. She ultimately decided to leave the industry altogether to pursue entrepreneurship. Although she’s happy in her new career, Davenport still wonders about what might have been, had she not been subject to that noncompete clause—an inherent feature of most employment contracts in TV news. “It massively affected the direction of my career and the next decade of my life,” she says. “If I did not have a noncompete, I would not have left the industry I was so excited to be a part of for so many years.”

Bound by noncompete clauses

The type of predicament Davenport faced is one that millions of American workers may encounter at some point in their careers, in roles ranging from hair stylists to health care professionals, fitness instructors and security guards. In fact, about one in five workers are bound by a workplace noncompete clause that restricts their employment options, according to estimates by the Federal Trade Commission (FTC).

But change could be on the horizon. President Joe Biden issued an executive order in 2021 calling on the FTC to ban or limit noncompete agreements, and this January, the commission proposed a new rule to prevent employers from entering into new noncompete clauses and to rescind existing ones. 

Meanwhile, other government agencies have been tackling the thorny issue of noncompete clauses. They’re banned in four states—California, Minnesota, North Dakota and Oklahoma—while other states have enacted a variety of restrictions for these clauses, including compensation thresholds, according to the Society for Human Resources Management. And in May, Jennifer Abruzzo, general counsel of the National Labor Relations Board (NLRB), issued a memo outlining her view that noncompete clauses are unlawful. 

Keeping up-to-date on noncompete clauses requires employers and employees to track developments in state governments, while the FTC examines whether these clauses are an unfair method of competition, and the NLRB looks at the impact on workers, notes Wendy LaManque, a labor and employment attorney based in the New York City area. What’s clear, however, is that “a very interesting shift” is underway, she says. “The writing is kind of on the wall right now: Noncompetes are going out of favor.”

Why some employers favor noncompete clauses

Noncompete clauses have existed in some form for hundreds of years, though they became a popular retention tactic more recently among a wide variety of employers. These clauses place restrictions on the time frame and proximity with which workers can enter into competition with their former employer. 

There are legitimate business cases to be made for employers to enforce noncompete clauses, in that they may help to protect trade secrets, LaManque notes. But many employers also see these clauses as an opportunity to reduce the probability (and related costs) of employee turnover. This may, in turn, help companies justify paying for costly training or other expenses to retain their workforce, she adds.

In TV news, for example, a station might justify noncompete clauses for on-air talent because it heavily promotes the TV lineup in advertising to appeal to viewers, Davenport says. But off-air news personnel are often subject to the same clauses. This type of one-size-fits-all approach is often cited as problematic by the people who oppose noncompete agreements—and is similarly a reason why employers oppose an across-the-board ban.

Several trade groups openly denounced the proposed ban on noncompetes, including the U.S. Chamber of Commerce, the American Hospital Association and the National Association of Manufacturers. These groups cited concerns about the potential damage of a ban to their respective industries, highlighted the value these clauses provide in promoting innovation and competition, and even questioned the FTC’s legal authority to enforce such a ban.  

Why noncompetes can be problematic for employees

Not surprisingly, proponents of a noncompete clause ban have been equally vocal. Davenport wrote a letter to the FTC expressing her support of the proposal, citing her own experience along with other people working in TV news who have similarly struggled with the challenges a noncompete presents. “This clause literally affects peoples’ lives,” she says, adding that it’s more harmful to women than men, in her experience—a claim backed up by research studies that show these agreements exacerbate gender and racial wage gaps.

What’s more, forcing people to choose between their personal and professional lives may leave them with “massive regret” about the choice they must ultimately make, Davenport says. “It really limits your ability to leave a toxic work environment or a low-paying job or terms and conditions that aren’t working for you anymore,” LaManque adds.

Equally problematic is that these clauses may not take into account the nuances or realities of many roles. Many workers subject to noncompetes may not be privy to trade secrets, or their day-to-day contributions don’t directly dictate a company’s success, LaManque says. As such, non-competes may reflect workplace power dynamics rather than an effort to preserve legitimate business interests, she adds.

Combined, the restrictive nature of noncompete clauses ultimately hampers economic growth, according to proponents of a ban. The FTC estimates that a noncompete clause ban would increase earnings for American workers by between $250 billion and $296 billion each year.

What employers and employees need to know now

For employers and employees alike, it’s business as usual with respect to noncompete clauses unless relevant state law has changed, according to LaManque. But now may be a good opportunity for both camps to understand what types of agreements are currently in place. 

LaManque recommends that employers explore alternative ways to protect their legitimate business concerns currently covered by noncompete clauses. She also suggests they be aware that whatever prohibitions employees are subject to may be struck down as a noncompete clause, even if not termed as such. Companies may consider less restrictive measures that promote employment longevity, including incentives to stay rather than punishments for leaving, she adds. 

Unless the FTC enacts a ban, employees will continue to have little recourse. Employers can enforce noncompete clauses even if you are fired without cause, which is why LaManque recommends anyone who is subject to such an agreement to consult with a labor attorney to better understand your obligations and options, especially if you weren’t aware of the clause when you signed your employment contract.

As Davenport learned, while TV stations might negotiate on other terms of a contract, noncompetes were an “absolute non-negotiable.” So rather than sitting out of work for a year, moving locations or contemplating the daunting (and costly) idea of waging a legal fight with her then-employer, Davenport ultimately finished out her work contract and started focusing on a post-news career that now includes mentoring other journalists on their careers and navigating noncompete clauses. 

Is a noncompete clause ban on the horizon?

Proponents and opponents of noncompetes have something in common: They must wait for a decision by the FTC. And that may not come until April 2024, according to reporting by Bloomberg Law. Even if the FTC ultimately strikes down noncompete clauses, expect this debate to continue. “There’s a lot of speculation already that the FTC will be challenged in court,” LaManque says.

While Davenport is hopeful the FTC “makes the right call” to ban these clauses, she also wants employers to recognize how harmful they are for employees who are forced to stick it out in jobs that make them miserable in lieu of leaving for something better—which would ultimately be a win-win for both sides. “We should have the right to work, period. We should have the right to earn money, period.”

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