In January 2023, the U.S. Federal Trade Commission (FTC) issued a statement stating that it intends to prohibit employers from entering into non-compete clauses with employees nationwide. On April 23, local time, the FTC announced a complete ban on all employees, including senior executives, from signing new non-compete agreements. For existing non-compete agreements, the existing non-compete agreements of senior management will remain valid, and the existing non-compete agreements of other employees will no longer be enforced after the specified effective date.
Among other things, the final rule defines the term "senior executive" to mean a person who earns more than $151,164 and is in a "policy-making position." The effective date of the regulation is 120 days after the publication of the Federal Register publication, not after the FTC announcement.
According to FTC estimates, non-compete agreements will have the following impacts:
- New business formations: New business establishment increased by 2.7% and 8,500 new businesses were added each year.
- Innovation on the rise: An average of 17,000-29,000 patents are added each year. In the first year of the non-compete agreement, it is expected that about 3,000 to 5,000 new patents will be added, and in the tenth year, it will increase to about 30,000 to 53,000. This translates into an annual patent growth rate of 11-19% over a decade.
- Employee earnings increase: Employee salaries will increase by $400-$488 billion over the next decade, and the average annual income of employees will increase by an additional $524.
- Will there be more "Silicon Valley"?
"This is big news for anyone who works in tech in the United States. Non-compete agreements are now not only in California (as before), but across the country. Gergely Orosz, a practitioner in the tech industry, commented.
Orosz also goes out of his way to point out that "it's very, very relevant to anyone at Amazon," and that Amazon also has a non-compete agreement for low-level engineering positions, even at the L4 level, and that their non-compete discourages many people from changing jobs. Orosz predicts that Amazon will have no choice but to start paying more outside of California.
And before the policy was issued, if you were in Washington, a Microsoft employee would likely be prosecuted for changing jobs if he saw a better opportunity at Amazon. Amazon employees who want to leave their jobs to start their own businesses could likewise be sued for "competing" with their $1.87 trillion employer. The solution to both of these problems is simple: move to California, where Washington's non-compete statement cannot be enforced.
In addition, I believe many people still remember OpenAI's internal palace fight at the end of last year, when Altman was expelled from the board of directors, and many employees claimed to be leaving OpenAI. Three days later, Microsoft CEO Satya Nadella announced that Altman, Greg Brockman, and other OpenAI employees would join Microsoft to lead a new advanced AI research team.
Although in the end, these people returned to OpenAI, as the foreign media said: "This will only happen in Silicon Valley." "It doesn't work well anywhere else.
The California region, where Silicon Valley is located, is one of three states in the U.S. that have almost completely banned non-compete agreements. California legislated a ban on non-compete agreements in 1872 and further restricts non-compete agreements in 2023: By February 14, 2024, employers must provide current and former employees with personalized written notice that any non-compete clauses after leaving the company are invalid or face penalties. In addition, California has further protected employee benefits, such as extending employees' paid sick leave from three working days (or 24 hours) to five working days (or 40 hours).
"Non-compete agreements have no place in California. "The state's attorney general reminded employers and employees last year.
California's policies have also led to a very large flow of talent between Google, OpenAI, Meta and other major companies in this AIGC wave. According to statistics company Live Data Technologies, since December 2022, a lot of Google's talent has flowed into OpenAI, and OpenAI's members from Google and DeepMind teams account for 7.5% of the total inflow, much higher than Stripe in second place and Meta in third place.
Still, Silicon Valley companies have found workarounds, with the Economic Policy Institute (EPI) survey finding that many employers are still implementing de facto non-compete agreements. But if the company is challenged, employees are most likely able to win the case in court.
Giants, there is no opposition to success
The world has been competing for a long time. A 2019 EPI analysis found that nearly half of all U.S. businesses have employees in non-compete status. While it's difficult to provide exact numbers, the EPI survey report estimates that about 27 to 46 percent of all private sector employees are subject to some form of non-compete.
Litigation cases arising from non-compete agreements abound in China. Last year, it was reported that a former Baidu employee who switched to ByteDance was sued by the original company for violating the non-compete agreement, and was sentenced to pay 1.44 million yuan in compensation. This year, it was reported that a netizen who worked as a product manager at ByteDance broke the news that he was maliciously persuaded to quit after two years of work. A year after successfully getting an offer from Kuaishou and accepting a job, he suddenly received a notice that ByteDance actually sued him for violating the non-compete agreement and demanded liquidated damages of up to 600,000 yuan.
According to InfoQ's previous interview titled "Non-compete Agreements "Sinking: The Pit That Ordinary Programmers Can't Escape", non-compete agreements have become a common phenomenon and must be signed regardless of whether employees have confidential information, and the number of non-compete companies is very large, covering almost all well-known Internet companies.
And abroad, this is not uncommon.
In 2020, former Brian Hall, the former vice president of product marketing at Amazon Web Services, accepted a position at Google's level after failing to be promoted, and then Amazon sued him for violating the terms of the non-compete agreement, which required Hall to be barred from working in cloud marketing at Google, which caused a lot of controversy at the time, in part because the non-compete agreement did not only cover core technical talents.
Interestingly, according to reports, during the discussions before and after Hall signed the agreement, Amazon executives repeatedly told him that the company would not enforce the non-compete clauses in the "template" non-disclosure agreement. At the moment of the FTC's final rule, he also tweeted his joy: "What a day it was for employees. ”
However, below the post, someone said, "Unfortunately, the FTC has no authority to do this, and the moratorium will come soon." ”
This is not very good news for businesses. The FTC received nearly 27,000 letters commenting on the proposal, with Wall Street in New York being the most vocal in opposition. One of the most popular employee control strategies for Wall Street companies is non-compete agreements.
Wall Street financial firms are concerned about the damage caused by a blanket halt to non-compete agreements. If an employee is exposed to highly sensitive, proprietary information and immediately switches to work for a company's biggest competitor, it can be a serious problem.
"The blanket suspension of non-compete agreements will harm competition and economic operations. The Securities Industry and Financial Markets Association (SIFMA), a trade organization for the securities industry, wrote in a comment letter. The SIFMA board of directors is made up of executives from major financial companies such as JPMorgan Chase, Morgan Stanley, Bank of America, Citigroup, and Goldman Sachs.
Major corporations with board seats in various intellectual property trade organizations, including Google, Apple, Pfizer, ExxonMobil, General Electric, Procter & Gamble, General Mills and Nike, have also voiced opposition to the trade committee.
And according to FTC Chair Lina Khan's public remarks last October, the vast majority of comments strongly supported the FTC's proposal to suspend non-compete agreements altogether.
It is not easy to revoke a non-compete agreement. New York State, where Wall Street, where the FTC's proposal is most strongly opposed, has previously proposed a ban on all non-compete agreements in the state, but industry interests have clearly opposed it, and the proposal was recently rejected by New York Governor Kathy Hochol.
Laurie Chamberlin, head of LHH's North American recruitment program, said the trade council's move has put Wall Street, already hit hard by the pandemic, into a further disadvantage. Chamberlin explained that with the most unpopular reopening policies in the market, "the major Wall Street companies are suddenly realizing that they don't have the strong talent attraction they used to have."
What happens after a blanket non-compete agreement?
Paul Webster, North America managing partner at Page Executive, a recruiting firm, made it clear that the ban would allow for greater mobility between positions in Wall Street firms, especially in areas such as mergers and acquisitions, sales and deals, which have long been subject to non-compete agreements.
Matt Shore, CEO of Wall Street recruitment firm Steve Douglas, said that the leadership of Wall Street companies already needs to take a hard look at employee engagement and satisfaction to avoid a "mass exodus because of their poor work experience."
Shore recommends that Wall Street companies should conduct a comprehensive competitive analysis across all sectors and at all levels to ensure that their roles are competitive in the marketplace, including analysis of benefits, paid leave policies, maternity benefits, career mobility, and employee satisfaction surveys.
In Shore's view, the only thing a company can grasp is the working environment of its employees and the company's compensation structure.
If top talent leaves due to the loosening of non-compete agreements, companies will inevitably need to come up with more competitive compensation packages to retain them. Companies may have to offer more generous compensation packages to those who are interested in leaving, or be willing to negotiate packages. Kareem Bakr, managing director of recruitment firm Phaidon International, said it was likely to trigger a "very intense bidding war".
Of course, Wall Street can also use other methods, such as deferred compensation, to discourage employees from leaving. The financial industry can also increase stock or option pledges to increase employee stickiness. Webster noted that these are already common compensation tools and that they will be used significantly more frequently after the disappearance of non-compete agreements.
Of course, it is also a viable option to directly offer a high salary. Webster bluntly said that if other companies offer $500,000 an annual salary, then you can directly offer $800,000, so that the chances of talent joining and retaining are naturally higher.
For a flexible market in the post-non-compete era, it will be easier for job seekers to find employers with a more work-friendly approach.
Webster said businesses may need to be more flexible in their post-COVID office policies. He noted that while industry giants like JPMorgan Chase and Goldman Sachs may still be eligible to continue requiring five-day work a week in office buildings, 90 percent of companies must compromise on flexible options such as remote work or risk losing their talent appeal.
While the above advice is aimed at Wall Street companies, it is practical for all businesses. It can be seen that the prohibition of non-compete agreements is indeed more beneficial to employees. However, this does not mean that companies do not have the means to protect their business.
Leslie John, a partner at Ballard Spahr, said, "There are other agreements that companies can enter into to protect their proprietary information, trade secrets and intellectual property. In addition to non-compete agreements, many companies use non-solicitation agreements and non-disclosure agreements to bind employees who have access to their trade secrets and other proprietary information.
"Therefore, even if the non-compete agreement disappears completely, employees will still be bound by other contractual agreements. John said.
It is understood that both the current U.S. trade secret laws and non-disclosure agreements (NDAs) provide employers with sophisticated means to protect proprietary information and other sensitive information. Researchers estimate that more than 95% of non-compete employees have signed NDAs.
Reference Links:
https://www.ftc.gov/legal-library/browse/rules/noncompete-rule
https://www.cnbc.com/2024/02/08/one-of-wall-streets-favorite-employee-control-tactics-is-under-attack.html
https://www.geekwire.com/2020/amazon-sues-former-aws-marketing-vp-brian-hall-accepts-google-cloud-job/
https://www.junhe.com/legal-updates/2302