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Banning noncompete clauses could usher in a golden era for new businesses
Posted by Grace Townsley
February 2, 2023
Will ending noncompete clauses position startups and young businesses for a new wave of growth? Some experts who see noncompetes as a way to protect established businesses from industry newcomers think so.
Because when top talent is free to apply their experience, passion and skills to emerging startups, a huge market shakeup could be on the horizon.
Noncompete agreements have been shown to unfairly reduce competition
Noncompete agreements are a type of contract that limit an employee’s ability to work for, or start, a competing business. These contracts typically include restrictions on the geographical area the employee can work in, and how long they must wait before reentering the industry after they leave the company.
The purpose of noncompetes is to protect trade secrets and strategies. If key leaders within a company are free to leave, they could use those trade secrets to help the competition or beat their own former company. But according to some reports, lower-level employees who don’t have access to trade secrets are increasingly being held in place by these agreements — which limit their ability to seek a higher-paying job and hinder healthy market competition.
When exploited, noncompetes prevent these workers from moving up the pay scale. Because moving companies is the most reliable way to earn a raise, millions of workers across the country struggle to raise their income level over time.
In January 2023, the Federal Trade Commission proposed a ban on all noncompetes
If it goes into effect, this ban will apply to all employees, except ownership partners. Partners may still be barred from founding or joining a competing company, but lower-level employees and executives will be allowed to transition between companies with no restrictions.
The FTC’s proposed ban is under a 60-day period of public comment, then is set to take effect in March.
With noncompetes banned, workers are in for a payday
Today, roughly 18% of workers are under a noncompete agreement. If the proposed ban goes through, 30 million working Americans will be impacted.
In states like Georgia, where a 2011 state law gave employers even greater flexibility in using noncompetes, this ban is likely to have an oversized impact. There, employees like managers, supervisors and sales personnel can be held to a two-year noncompete, which forces many workers to leave the state or change industries.
The FTC’s research estimates that by removing noncompetes, employees stand to earn as much as $296 billion in additional income, as they’re freed to pursue higher-paying jobs. But at least a portion of that added income is expected to come from consumers, as companies raise prices to cover rising wages.
The ban on noncompetes particularly stands to benefit employees who lose their jobs due to layoffs or disciplinary action. With a noncompete contract in place, many employees are forced to change careers or move out of state to find a new job, even if a layoff put them out of work. That places an undue burden and additional stress on workers — especially low-income workers who can’t afford to move every time their position is eliminated.
The ban on noncompetes benefits workers in another way — by reducing the litigation costs associated with enforcing noncompetes in court. Fighting a noncompete can cost workers $10,000 for a simple case, and $100,000 or more for complex cases.
Without noncompetes, employees can join other companies or launch businesses without the threat of tens of thousands of dollars in legal fees looming over their heads.
If passed, the noncompete ban will open a new talent pool for startups
By banning noncompete agreements, startups are positioned to benefit from the increased mobility of experienced employees. This allows them to attract skilled talent who would have otherwise been locked into a lengthy noncompete with a larger, more valuable company.
It also increases the chance of startup success, as these growing businesses can tap into the experience and skills of local workers with industry-specific expertise.
The FTC’s noncompete ban faces headwinds from states and companies who say the regulators are overstepping their boundaries. While the FTC has the authority to regulate competition, some say this rule will do more to harm strong companies, raise prices and increase employment churn than to help employees.
But if the proposal is passed, companies will have up to six months to cancel their noncompetes and give employees the freedom to transition to new jobs.
What does that look like for the future of startups? Expect to see growing new businesses gain top talent as employees at every level are released to pursue any opportunity at any company.
And watch for more new businesses to launch in the coming years. Without noncompetes in place, workers are free to use the knowledge they gathered at their former company to launch a new, better version of the business.
Want more? Since 2006, Escalon has helped thousands of startups grow faster with our back-office solutions for accounting, HR, payroll, taxes, insurance and recruiting. Talk to an expert today.