A Look at How the New Rule Banning Noncompete Clauses Could Affect Recruiting Firms

With the Federal Trade Commission’s new rule banning most noncompete clauses in employer agreements, big changes could be underway when trying to recruit talent. John Arbolino of Boothroyd & Co., David McCormack of DMC Partners, Bob Nahas of Nahas Executive Search, Marian Carrington of Carrington & Carrington, Larry Hartmann of ZRG, Russ Riendeau of New Frontier Search Company, Teague Splaine of Emory Search, Darren Raycroft of Bedford Group Transearch, Gary Erickson of Executive Search Partners, Nada Usina of NU Advisory Partners, and Kyle Samuels of Creative Talent Endeavors join Hunt Scanlon Media to share their thoughts on this hot topic!

May 8, 2024 – On April 23, the Federal Trade Commission (FTC) issued a new rule that bans non-compete clauses for workers across all industries, with limited exceptions. The rule will prohibit most employee non-compete agreements with retroactive effect, except existing non-compete provisions. The rule also requires employers to notify workers, including former employees, that the non-compete clauses are no longer in effect.

The rule defines “worker” to include employees, interns, externs, independent contractors, volunteers, apprentices, and sole proprietors, whether paid or unpaid. However, franchisees are not included in the context of a franchisor-franchisee relationship, but do include employees of franchisees.

The rule is not yet effective and legal challenges are already looming. However, the FTC predicts that the rule will lead to higher worker earnings, reduced health care costs, new business formation, and an increase in innovation.

“It would mean a sea change in executive search in this country, as the recruiting market would suddenly be much more liquid,” said John Arbolino, a managing director at Boothroyd & Co. “But it’ll be fought vigorously in the courts and I’d be surprised if it was enacted this year.”

Although the ban affects new and not existing non-compete agreements, it will rattle multiple industries,” said David McCormack, CEO of financial services executive search firm DMC Partners. “Investment banks rarely use them and if they do, it’s a very short period of time. There is no IP on the sell-side, it’s just relationships.”

“The non-competes for the quant funds and market makers were quite punitive,” Mr. McCormack said. “I don’t believe in keeping anyone out for more than 12 months unless they are the IP. As with all things, employers and employment lawyers will find a new way to protect their business interests. It may come in the way of one year gardening leave periods that again leave lots of room for interpretation but employers aren’t going to roll over.

This will be challenged, it will be appealed, and it will linger, but every employer should be considering plan B.”

 Even before becoming an executive recruiter, I believed everyone should have freedom to choose for whom they want to work,” said Bob Nahas, managing director of Bob Nahas Executive Search. “Through my practice I was aware of the proliferation of non-competes but l-was shocked a few years ago when reading a study that showed they numbered in the tens of millions and covered workers with no special knowledge or skill set.”

“I have experienced situations where a candidate found out he’d signed a non-compete at his current firm after saying he had no recollection of signing one, but he had,” Mr. Nahas said. “Several where the candidate said they had been presented with it after accepting the position and it being too late to turn back. Trade secrets are a smoke screen, particularly in fashion and retail where I do most of my work. Well-run companies often know what factories their competitors use and can come close to estimating the competitors’ costs. Some may say that a company paying an individual’s salary and benefits during the course of a non-compete makes the situation equitable. It doesn’t because, particularly at more senior levels, compensation is seldom the primary factor in someone wanting to take a position elsewhere. All the power and leverage has been with the companies, creating an unfair imbalance which in effect eliminates an employee’s freedom of choice.”

“I am expressing my strong support for the new law that seeks to ban non-compete clauses in employment contracts,” said Marian Carrington, principal and co-founder of Carrington & Carrington Diversity Executive Search. “As a search leader, I have witnessed firsthand the negative impact these clauses can have on individuals and the broader economy. Non-compete clauses restrict employees from working for a competitor or starting a competing business for a certain period after leaving their current job.”

“While these clauses may have been intended to protect businesses, they often have the unintended consequence of limiting job mobility, stifling innovation, and suppressing wages,” Ms. Carrington says. “By banning non-compete clauses, the new law will help foster a more competitive and dynamic labor market. It will enable employees to seek better opportunities and utilize their skills and knowledge more effectively. This, in turn, will encourage innovation and entrepreneurship, leading to economic growth and job creation. Moreover, banning non-compete clauses is a matter of fairness.”

“These clauses disproportionately affect minorities and low wage workers who are less able to negotiate the terms of their employment,” said Ms. Carrington. “They can be particularly harmful in industries where there are few employers to choose from, leaving them with little choice but to accept these restrictive terms. In conclusion, this ban is a step in the right direction towards creating a more equitable and vibrant labor market that benefits both employees and businesses.”

“ZRG sees this as a moment of significant empowerment for both employees and employers. By simplifying the process of transitions, we’re creating a more vibrant and competitive job market. This environment urges companies to prioritize retention, culture, and advancement,” said Larry Hartmann, CEO of global talent firm ZRG.

“It’s time for those organizations that have leaned on restrictive contracts to keep their top talent to rethink their approach. They must strive to become companies that employees deeply value,” Mr. Hartmann added. “This move not only broadens career opportunities for individuals but also heralds a positive that promises enhanced corporate vitality and greater satisfaction for employees. It’s a win for the entire market and will challenge organizations to be better.”

The recent FTC ruling to void the use of non-competes will be a watershed moment for any employee that was required to sign a noncompete at the time of hiring to secure employment,” said Russ Riendeau, Ph.D., senior partner and chief behavioral scientist with New Frontier Search Company. “Noncompete agreements have been handcuffing business professionals for the past 50 years being forced to sign one as conditions of employment. Successful professionals that end up wanting to leave their company for whatever reason—dysfunction, culture, poor comp plans, desire to open their own business, relocation—were forced to leave their industry and value to the marketplace to find a new job.”

“The argument of an employer walking away with trade secrets and confidential information is not the same as the legal bindings of a non-compete,” Dr. Riendeau said. “Non-disclosure agreements can still be enforced. This ruling will start to force company leaders to do a better job at maintaining stronger commitments  with customers  deeper into the leadership team, compared to allowing the sales team to have primary contact and influence with the customers.”

“The argument that noncompetes incentive companies to invest in talent is not accurate,” said Dr. Riendeau. “It’s more like holding an employee ransom to keep them serving the company’s purposes. Good companies invest in talent regardless of a noncompete, so why now is this a argument? Noncompete agreements don’t align with commitment, loyalty or longevity of employees.”

“In my 20+ year executive recruiting career, I can count on one hand the number of times noncompetes have been enforced, or a noncompete clause restricted an executive from leaving,” said Teague Splaine, founder and CEO of Emory Search. “As a recruiter, I do not think this will give us ‘better access’ to executives who would otherwise pass on opportunities due to their noncompete clause.”

“At a macro level though, I think this is a great thing,” Mr. Splaine said. “People should have the opportunity to go anywhere and pursue whatever they wish to. Especially where they may have an opportunity to earn more money. Economics plays a big role in people deciding to pursue other opportunities. Noncompetes restrict people from pursuing anything they wish to. At a micro level, legislation should not include all positions. It should be narrower and perhaps apply only to those who may have confidential IP they can bring with them and potentially use to build a competitive offering. That should be more closely monitored.”

It is candidly hard to fathom a post non-compete world, just ask any executive search consultant and likely any HR or business leader about how a non-compete threw a wrench into their search process,” said Darren Raycroft, managing director, North American life sciences & healthcare at Bedford Group Transearch. “There was tremendous inefficiency from the hiring company in applying resources to understanding the unique applicability on the non-compete and then devising strategy and assigning probability to successfully navigating around it, all in an effort to land that star candidate from a competitive organization.”

“The positive of the status quo was that oftentimes the existence of a non-compete did indirectly force companies to broaden their search parameters and hire talent that was not necessarily currently employed within the competitive set,” Mr. Raycroft says. “This said, the downside was that large enterprise organization with a significant bank account and legal resources at their disposal could and would often have a much higher risk tolerance to “go to battle” over a non-compete agreement for an all-star executive; a luxury that a smaller or mid-sized competitor without access to the same pocketbook and/or resources could reasonably undertake.”

“The net result is a win for employees at all levels with much clearer and transparent rules of engagement for talent acquisition that will inextricably force all organizations to creatively reinvent methods for (carrot) retention of key talent beyond the legal (stick) restriction of a non-compete,” Mr. Raycroft says.

“Executive Search Partners rarely see non-compete clauses required by our clients but where we do we often advice both employers to discard them for the following reasons,” said Gary Erickson, managing partner of Executive Search Partners. He points first to the Negative Impact on Recruitment. “Companies risk deterring potential hires by requiring noncompete agreements,” Mr. Erickson says. “Candidates often hesitate to join a company that restricts their future career options.”

“It also has a negative impact on employee morale,” he said. “Restricting an employee’s career options via a non-compete is seen by employees as another reason why this company is not the best company to work for. Paradoxically, not requiring non-competes increases retention. For most employees, the freedom to seek better prospects is essential for their overall well-being and job satisfaction.”

“From an employee perspective it stifles professional growth,” Mr. Erickson said. “Noncompete clauses limit employees’ ability to explore new opportunities. Such limitations can hinder career advancement and personal development and reduce morale. Lastly, it creates unequal bargaining power. Employees often lack bargaining power during contract negotiations. Noncompete clauses are often presented as take-it-or-leave-it terms, leaving workers with little room for negotiation. Forcing a prospective employee to sign a non-compete is the first indication that maybe this is not such a good company.”

“The FTC’s new ruling on non-compete clauses drastically reshapes the terrain for executive recruiting by banning most new non-compete agreements, even for top-tier senior executives,” said Nada Usina, the firm’s co-founder and CEO of NU Advisory Partners. “This change unleashes executive mobility and transforms career advancement opportunities. Without these legal shackles, executives can explore the job market more freely, igniting a dynamic reshuffling of talent.”

“Companies must now innovate beyond legal constraints to retain talent, sparking heightened competition for skilled leaders,” she said. “Organizations are compelled to enhance compensation packages and employee benefits as a strategy to attract and secure the industry’s finest executives. Yet, successfully retaining high-caliber professionals demands more than just lucrative paychecks. Cultivating a dynamic, inclusive and engaging company culture, coupled with a compelling strategic vision, is essential – as is a CEO’s capacity to instill confidence in the team’s ability to execute this strategy. Additionally, with the diminished reliance on non-compete clauses, organizations will need to focus more on confidentiality agreements and stringent internal controls to safeguard proprietary information.”

“Overall, the FTC’s decision intensifies competition in the executive job market, turning it into a fiercer, more fluid battleground for top talent,” Ms. Usina says. “It empowers executives and challenges companies to elevate their strategies for attracting, retaining, and securing their most valuable human assets. CEOs and businesses must now inspire and innovate or risk falling behind.”

”The FTC’s proposed ban on non-compete agreements in the U.S. is expected to be a hot topic, particularly in industries where closed ecosystems and client ownership are paramount,” said Kyle Samuels, founder and CEO of executive search and HR advisory firm Creative Talent Endeavors. “Fields like law, talent management, and consulting—where relationships with clients form the bedrock of business—will likely experience heightened concern and debate over the ruling. Critics in these sectors fear that eliminating non-compete clauses could erode their competitive advantage by making it easier for former employees to poach clients or leverage sensitive information.”

“However, for professionals who frequently move across industries and for those in roles where client ownership is less relevant, such as executives in B2C companies, where you sell to millions as opposed to a small group of big spending corporate clients, the impact of this ruling will likely be minimal,” Mr. Samuels says. “These roles often emphasize internal management, employee relations, and strategic planning rather than direct client relationships.

“Ultimately, while the ruling has sparked strong reactions in client-driven industries, it may pave the way for greater job flexibility and mobility across the broader workforce,” said Mr. Samuels. “The final form of the ruling will depend on public feedback and legal challenges, but its ramifications could reshape employment practices nationwide.”

Related: Is it Finally Adieu for the Noncompete Clause?

Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Executive Editor; Lily Fauver, Senior Editor – Hunt Scanlon Media

Share This Article

RECOMMENDED ARTICLES

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments