The FTC’s decision to ban non-compete clauses caused a stir in the business world when it was announced last month.
While the reaction from business groups has been swift (a federal lawsuit has already been filed in Texas), companies that cling to the protection of non-compete clauses are missing out on the opportunities created by this new employee freedom. It will be.
Non-compete clauses have been a reality of the American business environment for more than 100 years. Companies, wanting to protect their competitive advantage and avoid theft of intellectual property, establish non-competes as a means of locking in employees, who can take lower-paying jobs in other fields if they so desire. Or forced them to move to an entirely new city. Leave.
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With this decision, the FTC put an end to this practice and banned non-compete clauses for all companies except for a few key roles and industries. The business community, led legally by the U.S. Chamber of Commerce and the Business Roundtable, reacted quickly, filing a lawsuit against the decision less than 24 hours after it was announced.
Companies are looking for their next move
While the legal complexities are being argued in federal court, thousands of businesses are at a loss to figure out their next move. Should they proceed as if the ban will be upheld, and if so, what do they need to do to protect themselves and continue to protect their employees?
This is reality. Eliminating non-competes will unclog the economic pipes. While it may seem easy to hang on to non-competes, the long-term winners in this situation will be companies with more empowered workforces and those that take advantage of a freer economy.
And there’s evidence of that too.
Look no further than the Golden State. Although California has effectively banned the enforcement of non-compete clauses since 1872, the situation has not worsened and California’s economy remains strong. This is also very effective.
Five out of the 10 largest companies in the United States are headquartered in California, including major technology innovators such as Apple, Alphabet, Nvidia, and Meta. These companies have undoubtedly relied on highly confidential and closely guarded trade secrets to build their new technological future. However, none of these companies were swayed by the lack of non-compete clauses for their employees.
It is a fundamental principle of capitalism. In a free market, if the best talent can reach the top positions without friction, everyone wins.
Business leaders are worried
It’s not necessarily surprising that the business community is outraged by the FTC’s ban. This is a change to the status quo, and it’s the type of change that business leaders tend to be nervous about. But that doesn’t mean business leaders should get nervous.
First, the FTC does not address noncompetition issues for executives, founders, and other groups with highly specific competitive knowledge. But if anything, the prohibition of anti-competitive conduct could usher in a new era of efficiency and corporate collaboration.
The companies that win are the ones that use this moment to ask themselves what talent they now have access to that they didn’t have access to before. How do you close the skills gap within your company and what do you do to make sure your employees really want to stay with your company?
Motivation is important. If enough employees leave due to dissatisfaction, the company will actually be better off and create more opportunities for motivated and truly talented employees. Invigorating the talent pool is actually healthy for companies, creating more mobility and opportunities for innovation.
It will also have a clear effect on managers. Now that non-competes are gone, companies will need to truly evaluate their employees and understand whether they are providing the value that employees want to keep working for them.
If any company could truly claim that a single employee determines the value of the business, then there was no company at all.
Even at its height, GE was greater than any one employee, or even one executive. Jack Welch’s executive team, which helped GE climb higher and higher, was unable to replicate that success when placed in a different environment. Bob Nardelli failed at Home Depot and Bruce Albertson disappointed at Iomega. GE’s talent was not about a particular individual, but about the company as a whole.
What you need to understand
Important points for both employers and employees to understand: Removal of non-competitor companies does not mean a sudden exodus or migration of employees from the market. Changing jobs for employees still carries a high degree of risk, and in many cases, employees will find it better to stick with a job they know versus a job they don’t know.
But at this critical juncture, the business world needs to ask itself a question. Is this really a battle worth fighting? At some point, the ban on non-compete clauses, as well as the ban on child labor and workplace discrimination, will be seen as a clear and necessary change.
Giving employees the freedom of where they work creates better outcomes and better incentives for both parties. It would be unwise for companies to ignore the opportunity of a freely mobile workforce.
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This article was written by and represents the views of a contributing advisor, not of Kiplinger editorial staff. The advisor’s record is available at SEC or finra.
