No More Non-Competes?

A new government proposal, if enacted, would force firms to find other ways to limit talent from jumping ship to competitors. 

Over the last two years, organizations have had to offer more money, better benefits, more flexible scheduling, and other incentives to prevent top talent from moving to rival firms. There has also been one legal tool to keep employees from jumping ship: the non-compete clause. But now, the US government could take that option away.

The Federal Trade Commission started 2023 by proposing a rule banning labor-contract clauses that bar departing workers from working for (or starting) a competing business—for months or, in some cases, even years. The federal government is concerned that non-compete deals suppress both labor mobility and pay.

The proposal, which is backed by the Biden administration, has immediately become a hot topic in executive circles. “Non-compete, non-solicitation, and non-recruitment clauses end up being very critical to the employer when they’re hiring,” says Ron Seifert, Korn Ferry senior client partner and leader in the firm’s North America Workforce Rewards and Benefits practice. While the rule won’t be finalized for months—and will likely face legal challenges—experts say organizations should consider alternatives.

Non-compete agreements govern a surprisingly wide swath of US workers. That includes more than 20% of people in management, finance, and sales—roles often involving trade secrets or valuable client relationships that departing employees can take with them. But organizations use these agreements in a variety of other industries, including such disparate jobs as doctors and sandwich-makers. Previous studies show that non-competes affect 13% of workers earning between $12.22 and $17 an hour, as well as 8% of those who make even less. Overall, the US government estimates that more than one in seven mid-career workers currently have a non-compete contract or formerly had one in their most recent job.

Experts say the move to do away with non-competes is another example of diminishing the power of companies to hinder employees’ current or future work prospects. Over the past few years, governments, customers, and investors have pushed organizations to stop compelling workers to sign non-disclosure agreements in harassment cases, as well as other documents that would limit employees’ options in resolving work disputes.

No one alleges that non-competes exist solely to cover malfeasance, however. Proponents say they’ve been used for decades, and for sound reasons. “The employer has to protect their intellectual property,” says Andrés Tapia, Korn Ferry’s global strategist for diversity, equity, and inclusion. The government, in its proposal, doesn’t dispute that, but counters that the clauses are often too broad, constraining worker mobility and stifling start-ups. The FTC estimates that the rule could increase wages by nearly $300 billion a year across the economy.

One alternative to non-competes is the so-called “garden-leave” provision, in which an employer pays a departing employee to not work for a period of months. These clauses are used widely in Europe, where non-compete clauses are difficult to enforce. “They are elegant and easier to understand,” says David Vied, a Korn Ferry senior client partner and sector leader for the firm’s Medical Devices and Diagnostics practice.

Companies could also use deferred compensation programs more broadly. These stipulate that employees will miss out on a large chunk of pay if they leave the firm prior to a certain date—a date that’s often far in the future. “There are levers to pull,” Seifert says. That includes, experts say, improving morale and motivation. “Engaged people generally don’t quit,” says JT Saunders, Korn Ferry’s chief diversity officer.