Earlier this month, the US Federal Trade Commission proposed a new rule that would ban employers from requiring noncompete agreements in employment contracts. The proposal, which would apply to employees as well as independent contractors, is already raising concern in the staffing industry while being welcomed in other corners.

Noncompetes are agreements in employment contracts that prohibit employees from working for competitor companies after their current employment for a specified amount of time and within a specified geography.

Doing away with such agreements as proposed by the FTC could seriously damage staffing firms, says George Reardon, an attorney with longtime experience in the staffing industry.

“‘Geographic’ noncompetes temporarily banning competition in a territory after a person’s employment (or independent contractor relationship) terminates are practically essential for enforcing the customer nonsolicitation clauses that the proposed rule admits are fair and enforceable,” according to Reardon.

Existing noncompete clauses would also need to be rescinded under the new rule, at great expense to employers.

Reardon anticipates the final rule is likely to be overturned by the courts, but by then the damage will have been done, he says. See his full comments in the sidebar.

Reardon isn’t alone in questioning the legality of the proposed rule. The US Chamber of Commerce called it “blatantly unlawful.”

The rule is also simply unfair from a business standpoint even setting aside legal arguments, according to Lisa Ann Cooney, senior VP, general counsel and corporate secretary at Day & Zimmerman, which includes Yoh Staffing Services and DZConneX.

“The idea behind a noncompete is that an employee was introduced to a client through his employer, and during employment, he was paid to build goodwill on behalf of the employer,” as stated by Cooney.

“If that employee leaves the employer to go to another company, so be it; he is earning a living,” she says. “That said, it is only fair that there be a ‘freeze’ in place — for a reasonable amount of time, usually one year — so that the original employer has time to introduce a new employee to its client, so that new employee can foster the client relationship and, ultimately, so that the employer can keep its goodwill.”

Some have argued that nonsolicitation agreements could do that, but many experts argue nonsolicitation agreements are not worth much as a practical matter.

“Think about it: Are you really going to bother your clients and ask them to testify that an ex-employee has solicited them?” Cooney posits. “Of course not. In comparison, if you have a noncompete in place that prevents a former employee from competing against you in any way vis-à-vis your clients, it won’t matter who solicited whom — your former employees will be prevented from doing business with your client during the freeze.”

For its part, the FTC reported the proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for approximately 30 million Americans.

However, the rule has been simmering for a while, and some states and agencies have already been taking a look at noncompetes.

A report released by the Federal Reserve Bank of Minneapolis in October 2021 says professionals in sales and related occupations were most likely to have noncompetes at 22%.

Noncompetes are a mixed bag for employers, the report argues. On the one hand, employers can use noncompetes as a tool for limiting wage growth and deterring workers from leaving. On the other hand, some employers and entrepreneurs may find noncompetes make recruiting new workers or starting new businesses more difficult.

The Minneapolis Fed also notes policies that limit noncompete contracts for low- and moderate-income workers can raise those workers’ wages. When Oregon ended the enforcement of noncompetes for hourly paid workers, wages for those workers rose by 2% to 3%, with occupations where noncompetes were more common seeing greater wage growth. The report also noted lower-wage workers often don’t have access to trade secrets that would need protecting under noncompetes.

Even as the FTC puts forward its rule, noncompete agreements are already not enforceable in all states. The Minneapolis Fed report noted California, North Dakota and Oklahoma do not enforce them. And there is movement by more states against such contract clauses. Oregon has made noncompete contracts unenforceable for hourly paid workers and certain other groups. Similarly, reforms in Massachusetts made noncompetes unenforceable for employees eligible for overtime pay, student interns and workers fired without cause. And Washington DC banned noncompetes for essentially all employees.

But the US Chamber of Commerce argues a broad prohibition across all states would harm business.

“Attempting to ban noncompete clauses in all employment circumstances overturns well-established state laws which have long governed their use and ignores the fact that, when appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition,” says Sean Heather, senior VP for international regulatory affairs and antitrust at the US Chamber of Commerce.

Legal experts Lisa Ann Cooney and George Reardon shared with SIA their thoughts about the impact of the Federal Trade Commission’s proposed rule banning noncompete agreements. Lisa Ann Cooney is senior VP, general counsel and corporate secretary at Day & Zimmerman, which includes Yoh Staffing Services and DZConneX. George Reardon is an attorney with longtime experience in the staffing industry.