Non-competes to be illegal? Now what?

03/06/2023

Non-competes to be illegal? Now what?



Jan. 19, the Federal Trade Commission gave notice of a proposed rule that would ban employers from imposing non-competes on their workers. The rule would not only bar future non-competes but also rescind current ones.

"Research has shown the use of non-compete clauses by employers has negatively affected competition in labor markets, resulting in reduced wages for workers across the labor force--including workers not bound by non-compete clauses," the FTC said in its Notice of Proposed Rulemaking. "This research has also shown that, by suppressing labor mobility, non-compete clauses have negatively affected competition in product and service markets in several ways."

It could take months, even years, for this ban to take effect. Even after it does, a judge or Congress could delay or strike down the rule. But that shouldn't stop you from asking yourself a key question now:

What is it you're protecting with a non-compete?

Regardless of what the FTC does, the answer could lead you to change what you require, or give up non-competes entirely.

For instance, you may require non-competes because you don't want your trade secrets to leak outside the company. The FTC appears to be particularly leery of this argument. It referenced a couple of cases (Illinois v Jimmy Johns and Cowley v. Prudential Security) that involved non-competes imposed upon thousands of minimum-wage workers, sandwich makers, delivery drivers, and security guards. The Wall Street Journal reported 30% of independent hair salon owners required new hires to sign agreements forbidding them from taking a second job, doing freelance work outside the salon, or moving to a competitor for higher pay.

In contrast, our industry's most progressive and successful truss and component plants are also the most open and collaborative. Being perpetually willing to have competitive leaders walk their plant projects a commitment to continuous improvement and positive, confident energy that attracts people. Just because someone watched a Bruce Lee movie does not make them a karate champion. You might argue you need non-competes to protect your customer list, but data scraping by industry segment is a commodity in this age of technology. Every person and every company has a data trail. Some claim pricing lists are the secret sauce responsible for the company's success. If your competitive value rests on the pricing list, you have much larger issues.

A third argument for non-competes is that it keeps knowledgeable people on your staff from quitting, opening a store similar to yours, and "stealing" your customers. Opening that new store doesn't seem to bother the FTC that much, as its NPRM argues that handcuffing the worker with a non-compete can restrain trade.

As for stealing customers, the FTC said its ban on non-competes would still permit other types of restive employment covenants. Teresa Thompson, attorney at Fredrikson Law says, "The proposed rule does not impact the use of non-solicitation provisions or confidentiality/trade secret provisions so long as they don't act like a de facto non-compete." This allows for a way that companies can cover their assets while also allowing freedom to their employees, creating more of a win-win for both parties.

"These covenants generally do not prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker's employment with the employer," the FTC said. "However, under the proposed definition of 'non-compete clause,' such covenants would be considered non-compete clauses where they are so unusually broad in scope as to function as such."

Non-competes are illegal in these 3 states: California, North Dakota, Oklahoma. Talking with our LBM clients in these states, a yawn or a chuckle precedes their general comments: "If someone does not want to be on our team, why in the hell would we try to keep them here." They scoff at the idea thinking non-competes will help them retain talent. Instead, choosing to take on the competition for talent in these three ways:

1. Competing in Best Place to Work competitions. As many already know, surveying the employees and embracing their requests in an open, collaborative way creates a winning, high-retention culture.

2. Offering equity/phantom stock or ESOP plans as part of the compensation offering. Sharing the profits creates the highest level of alignment, allowing companies to be the preferred employer in their area.

3. Be kind and reasonable to people. In perpetuity, people will have career options. Companies that are not kind will continue to have hiring challenges. Think Karma. "More honey, less vinegar."

The FTC estimates its proposed rule will impact 20% of the U.S. workforce--30 million workers--and increase wages by $296 billion. The question to ask in response to this new rule might be, "How can this new law increase my access to top talent?"

Hire Smarter™ - Tony Misura.