The FTC's decision to ban non-compete clauses caused a stir in the business world when it was announced last month.
While business groups have been swift to respond (a federal lawsuit has already been filed in Texas), companies that try to hang on to the protections of non-compete clauses will miss out on the opportunities that this new employee freedom creates.
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 trying to figure out their next move
Thousands of companies are left in limbo, unable to decide their next move while the legal complexities are debated in federal court. Should companies act as if the ban will remain in place, and if so, what do they need to do to protect themselves and retain their employees?
This is reality. Eliminating non-compete clauses will unclog economic pipes. While it may seem easy to hold on to non-competes, the long-term winners in this situation will be those with more empowered workforces and those that take advantage of a more freely moving economy. It will be.
And there is evidence for that.
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.
This is a fundamental principle of capitalism. In a free market, everyone wins when the best people can get to the best places without friction.
business leaders are nervous
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 the noncompetitive issues of executives, founders, and other groups with highly specific competitive knowledge. Rather, prohibitions on noncompetitive conduct could usher in a new era of efficiency and corporate cooperation.
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 key. In fact, companies do better when underserved but unhappy employees leave, creating more opportunities for motivated and truly talented employees. Stirring 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 GE, at the height of its power, was bigger than any one employee, or even any one executive. Jack Welch's management team, which helped GE reach ever-increasing heights, could not replicate that success when placed in different environments. Bob Nardelli failed at Home Depot, and Bruce Albertson disappointing at Iomega. GE's talent was not tied to any one individual; it was the entire company.
What you need to understand
Importantly for both employers and employees, the repeal of non-compete clauses will not result in a sudden mass exodus or transfer of employees. There is still a high degree of risk when employees change jobs, and in many cases, employees will find that it is better to stay with a company they know than one they don't.
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 to choose where they work produces better outcomes and better incentives for both parties. It would be unwise for companies to ignore the opportunities of a freely mobile workforce.
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This article was written by, and represents the views of, our contributing advisors, not of Kiplinger's editorial staff. To see our advisory record, SEC or together finra.