FTC should support contract clarity instead of banning non-compete agreements

In a misguided attempt to deter unfair competition, benefit workers and spur innovation, the Federal Trade Commission (FTC) has proposed a rule to ban enforcement of noncompete agreements. This proposal would impact the employer-employee dynamic and have implications for approximately 30 million American workers. The effects of non-competes are highly varied and contextual. To account for these nuances, the FTC shouldn’t needlessly enact this blanket ban, but rather encourage clarity in employer-employee contracts.

Critics of non-compete agreements capitalize on anti-tech sentiment by leveraging tech companies’ use of the agreements as a call to action to ban them for the sake of workers and the economy.

Companies vary in their reasons for enforcing non-compete agreements, but they’re commonly used to protect trade secrets and proprietary information. Naturally, agreements like these are of critical value to information-heavy and innovation-based sectors, like tech.

Taking federal action to implement a blanket ban would presumptuously disregard the litany of state-level non-compete laws that provide much more nuance.

When considering the enforceability of non-competes, states consider various factors. These points may include the industry’s protectable/legitimate interests, pre-employment notifications and whether at-will employment is sufficient consideration for a non-compete that’s signed at the time of hire and/or that’s executed during employment. States also determine whether a court can modify a non-compete if a portion of the non-compete is void or unenforceable.

The main reason why non-competes are important to companies, including tech firms, is that they protect trade secrets, intellectual property and possible negative returns on investment from training employees that end up leaving them and becoming competition. The inability to enforce non-competes would make operations riskier for employers.

Furthermore, non-competes don’t have a uniform impact on workers throughout the economy. According to a study by the Economic Policy Institute, the percentage of employees subject to a non-compete varies significantly by different metrics, including by industry and pay level. As far as industry, businesses services and leisure and hospitality have the highest and lowest percentages, respectively, of workplaces where any employees are subject to non-competes. Moreover, the report shows that non-competes are more prevalent in higher-wage workplaces than lower-wage workplaces.

The use of non-competes is also disparate by sector, as different skill sets are typically associated with different norms and standards. In a sector like tech, where competition for highly skilled workers is intense and innovation is key to success, usage of non-competes is the norm.

Proponents of banning these agreements assert that they reduce workers’ mobility, thereby depriving them of higher wages and limiting possible innovation.  This potential effect is understandable to an extent, as restriction is the essence of a non-compete. However, in signing a non-compete, employees signal that they’re willing to make that tradeoff for the job. Therefore, it doesn’t say much to point out that employees under a non-compete are less mobile and as a result can’t jump to potential higher-paying opportunities — they chose to embrace that tradeoff by their own volition.

Critics frame the topic as if non-competes are a lose-lose for employees and only useful for employers, but they can certainly be in employees’ interests as well. They can match job seekers looking for long-term positions with employers, and often employees under non-competes receive training and education that can advance their skills and career.

Implicit in employees signing a non-compete is that they believe, by their own standards, that doing so is in their best interest. Third parties looking to nullify those agreements assume to know better than employees, rob employers and employees alike of their autonomy and may even cost employees their job.

If policymakers want to protect employees, they should focus on ensuring that contracts are clear to reduce asymmetric information between the potential employee and the employer. In a policy brief, the Mercatus Center suggests the FTC employ a targeted approach by requiring employers to inform prospective employees about non-compete agreements before employment offers are finalized. That way employees don’t face the dilemma of signing the non-compete or losing their job.

A blanket ban on a practice as varied and nuanced as non-competes is imprudent. Instead of banning them, policymakers should let states continue to determine whether they want to enforce non-competes. They could also look to encouraging and protecting honest and transparent contracts between employers and employees.

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