Non-compete agreements have been a standard practice across many industries within the United States as employers seek to safeguard their business interests and protect proprietary information. However, these agreements are also facing growing scrutiny and legal challenge.

Understanding Non-Compete Agreements

A non-compete agreement, also known as a covenant not to compete, is a legal contract between an employer and an employee. It typically restricts the employee’s ability to engage in competitive activities, such as working for a competitor or starting a competing business, for a certain period of time and within a specified geographic area. The primary objective of a non-compete agreement is to prevent employees from potentially harming the employer’s business by using proprietary information, trade secrets, or client relationships obtained during their employment.

Challenges Created Specifically for HR & Recruitment Teams

Restricted Talent Pool: Non-compete agreements can limit the available talent pool for employers, as potential candidates working for certain similar businesses are considered off-limits. Talented individuals who possess industry-specific knowledge or in-demand skills may simply not be considered. They may not even receive a response from a recruiter or HR professional because they know they will not be able to hire them.

Difficulty in Attracting Top Talent: Non-compete agreements may deter highly skilled individuals from considering employment opportunities with companies that enforce such agreements. Top-tier candidates who are seeking career growth, innovation, and the freedom to explore new opportunities may be less inclined to join organizations that impose restrictions on their future job prospects.

Hiring Delays and Costs: Non-compete agreements can introduce complexities and delays in the hiring process. Employers may need to invest additional time and resources in assessing candidates’ existing non-compete agreements, seeking legal advice, and negotiating potential modifications or waivers. This can lead to prolonged hiring timelines and increased costs associated with recruitment efforts.

Limited Knowledge Transfer: Non-compete agreements restrict employees from utilizing or sharing proprietary information gained from their previous employment. While this protects businesses’ confidential data, it also hampers the free flow of knowledge within industries. This limitation can impede the transfer of valuable expertise and innovative ideas from experienced employees to new recruits, potentially stifling growth and innovation within the organization.

Challenging Parties

Various stakeholders are actively challenging non-compete agreements, aiming to strike a balance between employee rights and business interests. Advocacy groups, including labor unions, worker organizations, and some legal scholars, argue that non-competes disproportionately affect low-wage workers, inhibit job mobility, and impede innovation. Some state governments have responded by enacting legislation that places restrictions on the use and enforceability of non-compete agreements.

As of January 5th, 2023, the Federal Trade Commission has proposed a rule to ban, in their entirety, non-compete agreements. Here are some facts presented by the FTC in their January 5th, 2023 press release FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition related to disadvantages for workers.

An estimated 18% of US workers, equating to 30 million people, are covered by non-compete agreements.
Elimination of non-compete agreements could increase workers’ earnings by nearly $300 billion dollars.
Research is indicating that a ban on non-competes across the US could close the racial and gender wage gaps by 3.6-9.1%.

While the decision is still in limbo, a strong case is being made for the elimination of non-compete agreements.

Alternatives for Employers

While non-compete agreements have long been a common tool for protecting businesses, employers are increasingly exploring alternative methods to safeguard their interests. Here are a few alternatives that can be considered:

Non-Disclosure Agreements (NDAs)

Employers can utilize NDAs to protect their confidential information, trade secrets, and proprietary data without restricting employees’ career opportunities.

Non-Solicitation Agreements

These agreements focus on prohibiting employees from soliciting clients, customers, or other employees to join a competitor. This allows employees to work in the same industry but minimizes the risk of direct competition.

Trade Secret Protections

Employers can strengthen their trade secret protections by implementing strict access controls, encryption, and robust cybersecurity measures. This approach places emphasis on safeguarding sensitive information rather than limiting an employee’s career options.

As the landscape surrounding non-compete agreements continues to evolve, it is essential for both employers and employees to stay informed about the legal implications and changing regulations. While non-compete agreements can serve a legitimate purpose in protecting businesses, they are increasingly facing challenges due to concerns over employee rights and market competition. By exploring alternatives, such as NDAs, non-solicitation agreements, and trade secret protections, employers can strike a balance between protecting their business interests and attracting and retaining top talent.