No Noncompete Clauses? What Does That Look Like?

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The FTC’s decision to ban noncompete clauses created huge waves in the business community when it was announced last month.

While the reaction from business groups has been swift (with federal lawsuits already filed in Texas), the businesses that try to cling to the protection of noncompete clauses are going to be the ones that miss out on the opportunity that this new employee freedom creates.

Noncompete clauses have been a reality of the American business landscape for well over a hundred years. Businesses, eager to protect their competitive advantage and avoid the theft of intellectual property, established noncompetes as a way to lock employees in, forcing them to take a lower-paying job in a different field or move to an entirely new city if they wanted to leave.

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With its decision, the FTC has put an end to this practice, banning noncompete clauses for all, save for a few key roles and industries. The business community — led legally by the U.S. Chamber of Commerce and Business Roundtable — has been swift in its response, filing lawsuits against the decision less than 24 hours after it was announced.

Businesses try to discern their next move

While the legal intricacies are debated in federal courts, thousands of businesses are waiting in limbo to understand their next move. Should they proceed as though the ban will be upheld — and if so, what do they need to do to protect themselves, and keep their employees?

Here’s the reality: The elimination of noncompete clauses is going to unclog the pipes of the economy. While clinging to noncompetes may seem like the easy thing to do, the long-term winners in this situation are going to be the businesses that take advantage of a freer-moving economy with a more empowered labor force.

And there’s proof for that, too.

Look no further than the Golden State. California has effectively banned the enforcement of noncompete clauses since 1872, yet the sky has not fallen, and its economy still chugs along — quite effectively, too.

Five of the 10 largest companies in the U.S. are headquartered in California, including major tech innovators like Apple, Alphabet, Nvidia and Meta. These companies have been able to forge new technological futures that undoubtedly depend on highly sensitive and well-guarded company secrets. Yet none of these companies has faltered because of the lack of noncompete clauses for their employees.

It’s a basic capitalist principle: In the free market, everyone wins when the best talent can get to the best places without friction.

Business leaders are nervous

That the business community is up in arms about the FTC ban isn’t necessarily a surprise: It’s a change to the status quo, the type that tends to make business leaders nervous. But that doesn’t mean business leaders should be nervous.

For one, the FTC isn’t touching noncompetes for executives, founders and other groups with highly specific competitive knowledge. But if anything, the ban on noncompetes can usher in a new era of efficiency and company alignment.

The businesses that are going to win the day are going to be those that use this moment to ask themselves what talent can they now access that they previously could not. How are they going to fill the skills gaps in their company, and what are they doing to make sure that their employees actually want to stay?

Motivation matters. A company will actually be better off if the sufficient but unhappy employees leave, creating more opportunity for the charged-up and truly talented. Stirring the talent pool can actually be healthy for a company, creating more mobility and opportunity for innovation.

It will also have a clarifying effect for executives. With noncompetes gone, companies are going to need to do true assessments of their workforces and understand whether they’re providing the value that employees want in order to stick around.

If any company can truly argue that a single employee is the value pivot point on which their business hinges, they don’t have a company to begin with.

Even GE, at the height of its power, was bigger than any one employee — or even executive. Jack Welch’s team of executives who helped GE reach bigger and bigger heights failed to replicate their successes when put in different environments. Bob Nardelli failed at Home Depot, while Bruce Albertson disappointed at Iomega. The talent of GE wasn’t related to any one individual. It was the company as a whole.

What to understand

Critically for both employers and employees to understand: The elimination of noncompetes won’t mean that the market suddenly sees a mass exodus and migration of employees. There’s still a high degree of risk that comes for employees changing jobs, and in many cases, workers are going to find that it’s better to stick with the one you know vs the one you don’t.

At this critical juncture, however, the business community needs to ask itself, Is this a battle that’s truly worth the fight? Like the ban on child labor or discrimination in the workplace, the ban on noncompetes will one day be looked at as being an obvious change that needed to happen.

Giving employees freedom in where they work creates better outcomes and better incentives for both parties. Businesses would be unwise to ignore the opportunities of a free-moving labor force.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Scott Leonard is a Managing Director at Alvarez & Marsal. He has a rich experience leading large scale, successful transformations and a strong track record of driving superior shareholder returns. Previously, Scott served as CEO, CFO, President and board director of public and private equity companies.