Winners and Losers If Non-Compete Agreements Are Banned

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If the U.S. Federal Trade Commission (FTC) is successful in getting a new rule enforced, non-compete agreements may soon become illegal in all 50 states. This gives employees reason to celebrate, while employers will feel despondent. Not surprisingly, while the change may make sense on the surface, the unintended consequences go much deeper.

According to a February 7, 2023, report by The Flip Side, nearly one-fifth of employees in the U.S. are asked to sign a non-compete. My financial planning firm has required non-competes for 40 years.

A non-compete agreement is a legal contract whereby an employee agrees to not go to work for a competing company when they leave the employer. Most non-competes are limited to competitors within a certain geographical area and for a specific length of time.

Why would an employer ask for, and an employee agree to, such a restriction? Because both have something to gain. The employee gains a job, of course, but usually the real incentives to sign a non-compete are specific training and experience that will enhance the employee’s skill set and value in the marketplace. Employers are primarily concerned with wanting a return on their (often significant) investment in training a new employee. If an employer invested time and money training an employee to master a job, obtain a master’s degree, or achieve professional certification, they would likely not benefit from their investment if the employee quit the day after they graduated to go work for a competitor across the street.

When used appropriately, the spirit of a non-compete is inherently a win/win. Unfortunately, some employers turned the agreement into a win/lose by making the restrictions so draconian that employees who left the company for any number of reasons could not support themselves financially.