In the past few days, there has been a hot topic of discussion: the United States intends to completely ban "non-compete agreements".
This week, the U.S. Federal Trade Commission (FTC) announced that it would completely ban all employers from entering into new "non-compete agreements" and other similar provisions with employees, including senior executives. Among them, the existing non-compete agreements of senior managers (those in "policy-making positions" with an annual salary of more than US$151164 (approximately RMB 1.09 million) are still valid, while the existing non-compete agreements of other employees will no longer be enforced after the specified effective date.
As soon as this decision came out, countless IT people who had been suffering from non-compete agreements for a long time shouted in support, and even predicted that the end of the non-compete agreement would be a major employment earthquake in the technology industry.
The high value of the non-compete agreement is unaffordable for ordinary people
The so-called "non-compete agreement" is a contract clause that prohibits employees with confidentiality obligations from working in a business competition with the original employer after leaving the company.
Although it may seem like an equal and voluntary "agreement", anyone who has signed it knows that there is little room for negotiation with the company in this regard: you sign it to get the job, and if you don't, you are asked to leave. In 2019, the University of Michigan published a paper mentioning that 30-40% of employees are only required to sign a "non-compete agreement" after they have been hired.
Perhaps, you think only top technical engineers, senior software developers, and executives need to sign non-compete agreements?
The U.S. Economic Innovation Group has conducted a survey: according to the occupational category, the probability of signing a non-compete agreement is calculated. According to the statistical results, among many occupations, the probability of signing a non-compete agreement for "architecture, engineering", "computer, mathematics" and "management" positions is more than 30%, and more than 6-26% of people in other industries need to sign a non-compete agreement to enter the job.
Not only that, but according to the latest data from the Economic Policy Institute, nearly one-third of companies now require all employees to sign non-compete agreements, even including the minimum hourly wage for cleaning jobs or food service.
From a legal point of view, employees can sue if they think the non-compete agreement is unreasonable – but only if you can afford it. The well-known Trembly law firm makes it clear on its website: "Non-compete litigation is often fast-paced and costly. ”
In other words, if you are an employee and want to get rid of the restrictions of a non-compete agreement, it will be difficult for you to go alone unless the next person you are going to is willing to fight a lawsuit for you.
For example, CATL's non-compete agreement in December last year caused heated discussions in the industry. A fresh graduate who received a CATL employment notice broke the news to the media that to join CATL, he needed to sign a 13-page non-compete agreement, and if he didn't sign it, he would not be hired.
In this non-compete agreement, CATL listed a list of 50 non-compete companies, including BYD, Great Wall Motor, Li Li, Xpeng, NIO and many other car companies. Later, a person familiar with the matter revealed that this was the previous version, and the number of companies in the latest list had increased to 100. At the same time, the agreement also states that in the event of a breach of contract, the liquidated damages shall be 5 times the total pre-tax income or 1 million yuan in the 12 months prior to the resignation, whichever is higher - which means that if an employee leaves CATL and is claimed by the non-compete agreement, at least 1 million yuan will be compensated.
The ban caused an uproar
Essentially, for enterprises, the initiation of a non-compete agreement is to protect their core secrets and restrict core employees from being poached by competitors, which is a battle for talent, but for most employees, a non-compete agreement is a "shackle".
In its official release, the FTC wrote: "Non-compete agreements deprive people of their economic freedom, and in turn deprive them of all other freedoms. ”
"A non-compete agreement is a pervasive and exploitative practice that imposes contractual conditions that prevent employees from seeking a new job or starting a new business. It often forces employees to either continue in the job they want to leave or incur other significant harms and costs, such as being forced to move to a lower-paying field, forced to relocate, forced to leave the workforce altogether, or forced to deal with costly lawsuits. ”
According to the FTC, 30 million employees in the U.S., or about one-fifth of its workforce, are subject to non-compete. And in January last year, the FTC proposed to ban non-compete agreements from public consultation, and received 26,000 comments in just 90 days, 96% of which were supportive.
In response to this situation, FTC President Lina M. Khan pointed out that the existence of non-compete agreements not only depresses employee wages, but also stifles creativity and deprives the U.S. economy of vitality - the FTC estimates that once the non-compete is prohibited, the United States will add more than 8,500 new startups a year, the annual income of ordinary employees will increase by $524, and the number of patents will increase from an average of 17,000 to 29,000 per year in the next 10 years.
However, if non-compete agreements are completely banned, how can companies protect their core secrets and talents? In this regard, the FTC has given several "alternatives" to non-compete agreements:
- Trade secret laws and non-disclosure agreements (NDAs) provide businesses with a proven means of protecting proprietary and other sensitive information. Researchers estimate that more than 95% of workers with non-compete agreements have signed NDAs.
- Companies can retain key talent by raising wages and improving working conditions, rather than using non-compete agreements to force bundling employees.
It is reported that the ban proposed by the FTC, if effective, will cover almost all industries and companies in the United States. The ban is currently in the public notice period and will be published for 120 days. After the end of the publicity period, the provisions of the non-compete agreement will officially take effect, which also means that 30 million non-compete agreements will lapse by then. But in the meantime, the FTC will still face legal challenges – the U.S. Chamber of Commerce has filed legal proceedings on the grounds that the FTC is ultra vires.
"This sets a dangerous precedent for the government to micromanage businesses that could harm our businesses, our employees, and the economic environment. The U.S. Chamber of Commerce noted that the power to prohibit non-compete agreements should be vested in the states, and that the FTC does not have the authority to enforce them nationally.
At the same time, the ban has caused an uproar on Wall Street.
The founder of Third Street Partners, a talent firm that works as an investment manager, predicts, "Businesses will be built and destroyed by this rule, and real change will begin." Kathryn Mims, who oversees global antitrust and competition at White & Case, agrees that if the rule goes into effect, its breadth will affect many levels of staff across Wall Street.
Is a non-compete agreement good or bad?
Contrary to the objections and concerns from the corporate perspective, most ordinary employees strongly support the ban.
Steven Vaughan-Nichols, a longtime science and technology journalist, said:
"I'm not sure that a non-compete agreement will ultimately deliver these benefits that the FTC is talking about. But I know that in the decades I've been writing about tech, I've seen non-compete agreements become an iron collar around the necks of the tech's best and brightest employees, service desk workers, and even office cleaners. I understand that companies want to reduce competition and prevent employees from easily changing jobs, but I never think a non-compete agreement is the right thing to do. ”
People who have been "pitted" by non-compete agreements also came out to say:
My wife left the company she worked for at the end of 2022 to start her own company with a few friends who were in a similar industry. About a month after her resignation, her former boss suddenly informed her that she had violated the non-compete agreement.
The non-compete agreement provides that: (1) she cannot speak to any of her previous clients or any client of the company, (2) she cannot poach any developers from her previous company, and (3) she cannot engage in any work in any state or territory where the company has an office or any state or territory adjacent to the state or territory in which the company is located.
The first two are acceptable to me, but the last one is too harsh. Because the company has offices in the United States, Canada, and Mexico, she basically can't work in the U.S. and can only work in a small, remote part of Canada. In the end, in order to avoid spending a lot of money to go to court, she basically did not work for a year. ”
At the same time, a small number of netizens pointed out that although the non-compete agreement is a restriction, it is also a "benefit" in some cases: for some people, the non-compete compensation can also be a paid gap.
So what do you think about non-compete agreements?
Reference Links:
https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes
https://www.ft.com/content/681ca675-d92a-4be1-bcd3-ed31c16ab191
https://www.computerworld.com/article/2095092/the-end-of-non-compete-agreements-is-a-tech-job-earthquake.html