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Proposed Rule to Ban Noncompetes Prompts Employers to Think Creatively About Employee Retention

S.J. Steinhardt
Published Date:
Jan 17, 2023

noncompete agreement

The Federal Trade Commission (FTC)’s proposed rule to ban employers from imposing noncompete clauses on employees is causing them to assess what this means for them and their business and to devise alternatives, the Wall Street Journal reported.  

While these agreements are designed to retain talent and protect proprietary information, they are also faulted for restricting workers’ mobility, suppressing their wages and restricting innovation and professional development. Companies may work around the proposed rule by structuring nondisclosure agreements and employment contracts to reward longevity, lawyers quoted by the Journal said.

“Employers have operated with an understanding that they can protect their interests through noncompetes,” Matthew Durham of Salt Lake City law firm Dorsey & Whitney LLP told the Journal. “What you’re seeing, reflected in the FTC proposal and elsewhere, is a growing hostility to the idea that there should be those kinds of restrictions, and it’s changing the environment that employers have been comfortable with in the last number of years.” 

Noncompetes are regulated at the state level, and some states, such as California and Oklahoma, hold that they are unenforceable in all or nearly all employment contracts, the Journal reported.

Nondisclosure agreements, trade secret laws and nonsolicitation agreements can be used instead of noncompete agreements, but such agreements can be invoked only after an employee violates them, Julie Levinson Werner of law firm Lowenstein Sandler LLP told the Journal. “Once someone goes to another company, you’re really on the honor system,” she said. “You have no way to monitor what information is being disclosed or not.”

The FTC rule could also cause employers to use such tools as deferred compensation to give people incentives to stay.

“Do you get better results with honey or vinegar?” Werner said. “If you want to motivate people and have them happy to stay, you have to look at compensation, the overall environment, how you treat them.”

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