Is it Finally Adieu for the Noncompete Clause?
April 19, 2023 – Earlier this year, Shelli Herman of Shelli Herman and Associates jumped for joy when she read about the Federal Trade Commission’s (FTC) proposed rule to ban noncompetes. “Over the course of my 26-year career in executive search, these mostly unenforceable and highly precarious documents have caused me more than a few sleepless nights,” she said. “These seemingly ubiquitous noncompete clauses have reared their ugly head during some of our more high-profile searches. And I have attempted to recruit countless candidates for my clients who are eager to be considered for an opportunity but are regrettably stopped in their tracks because of a noncompete they vaguely recall signing when they were initially hired.”
“If I am lucky, candidates remember signing said document, have a copy, and can discuss what it means practically speaking,” Ms. Herman said. “These conversations are difficult, dispiriting, and have created unnecessary consternation.”
There are many issues revolving around the topic, and Ms. Herman attempts to simplify the argument. “Noncompetes are a prohibition on workers taking jobs with competitors, or burgeoning enterprises,” she said. “Experience tells me that the very worst part of this constraint is that it disallows workers from joining companies where they would be a much better fit. Restricting employees’ ability to easily change positions depresses productivity and it starts to really hurt firms because they can’t hire the workers that they want to hire, thereby stifling wage growth.”
Ms. Herman says that this can also cause eventual declines in entrepreneurship, as new businesses are harder to form when access to talent is difficult. “For those who do establish new organizations, it may be harder for them to hire and grow their business,” she said. “There’s a whole range of effects—on entrepreneurship, innovation, employability, wage growth, and productivity—that arise from noncompete agreements.”
The proposed FTC rule is not the first time noncompetes have been challenged and Ms. Herman notes that it may be helpful to know that California, Washington, D.C., North Dakota, and Oklahoma have banned them. “Eleven other states bar them for certain workers, especially those making below an established hourly wage or annual salary,” she said. “However, many contracts continue to include them, even in areas where they are restricted or banned. Even in these regions noncompetes can still harm, as in many cases workers are not aware that these provisions are not enforceable. The FTC’s proposal would require employers to withdraw existing noncompetes and tell workers that they no longer apply.”
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Simply stated, Ms. Herman says that it would be illegal for an employer to try to or to enter into a noncompete, or to suggest that a worker is bound by one. Covered workers would include: employees, independent contractors, interns, and volunteers, as well as any other worker, paid or unpaid.
Is the Noncompete Soon to be History?
The federal government has announced a proposed rule which would ban noncompete agreements between employers and employees, independent contractors, externs, interns, volunteers, apprentices, and even sole proprietors who provide a service to a client or customer. The Federal Trade Commission (FTC) stated the widespread use of noncompetes agreements is an “often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.” Under the proposed rule, a “noncompete” clause is defined “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”
Ms. Herman points to studies from the Social Science Review Network (SSRN) and Economic Policy Institute that argue that noncompetes hold down pay because it makes changing jobs harder; taking on a new role is one of the most common ways people obtain a raise. “The issue of noncompetes and their impact on wages for middle- and low-income workers deserves its own article and flies in the face of everything we are all trying to do around equity, inclusion, belonging, and access,” she said. “I can unequivocally make the argument here that by banning noncompete agreements, we make labor markets more competitive. When you have a competitive labor market, it increases hiring, which will push up the quantity that firms produce, which will in turn push down prices. Competition is, in general, good for prices, it’s good for consumers, and it’s good for workers.”
A Balanced Perspective
Ms. Herman says she likes to provide a balanced perspective and considered offering a few supporting words about the value of noncompete clauses but every argument she came up with lacked virtuous support or proof of concept. “Good riddance to those irksome noncompetes that have caused nothing but heartache for those negatively impacted by their antediluvian and entirely old-school limitations,” she said. “And for those of you who will soon potentially be free from the encumbrances of a noncompete, congratulations!”
Shelli Herman and Associates, Inc. serves clients across the corporate, nonprofit, and higher education sectors. The firm’s long roster of clients includes the Annenberg Foundation; the Arnold and Mabel Beckman Foundation; BENlabs; The Capital Group Companies/American Funds Distributors; City Year, Los Angeles; the Fresno Chaffee Zoo; the Griffith Observatory Foundation; Jewish Family Service LA; Laguna College of Art and Design; Loyola Marymount University; Omaha’s Henry Doorly Zoo and Aquarium; P.S. ARTS; the Saint Louis Zoo; Second Harvest Food Bank of Orange County; the University of California System; the Whitney Museum of American Art; and YWCA Greater Los Angeles.
Ms. Herman, who has more than 25 years of executive recruitment experience, has a strong record of leading searches and building upper management teams for a diverse clientele, including Fortune 500 companies. She has completed senior-level assignments in many industries, including consumer products, healthcare, high technology, and finance, as well as for nonprofit, conservation, and cultural organizations. Additionally, she brings an in-depth understanding of the unique cultural environment of academia that was gained while she held significant management positions at the University of Florida and Loyola Marymount University.
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Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media