A newly proposed federal regulation that would bar noncompete clauses in employment contracts would mark a big change for workers in the Philadelphia area and could eventually lead to better pay.
The Federal Trade Commission proposed the new rule on Thursday, estimating that it would expand career opportunities for 30 million people and increase wages by $300 billion per year.
This would most benefit lower-wage employees who have been held back from taking higher-paying positions at competitor businesses, local experts said. If the proposed rule is passed, it’s “a big win” for workers across industries, said economist David Abrams, a professor at the University of Pennsylvania’s Carey Law School.
“Noncompetes have gotten way overused in recent years, from their origin of trying to protect firms’ intellectual property,” Abrams said. “It’s gotten silly, pernicious, and harmful to competition.”
These agreements do sometimes benefit the greater good, Abrams said — when companies are constantly worried about losing employees to competitors, they might withhold information and create roadblocks to productivity and innovation. But, Abrams said, in many cases, the loss of a noncompete agreement will not put intellectual property — such as inventions, designs, and innovative business practices — in danger.
Eliminating noncompete agreements would not only increase workers’ ability to change jobs as a way of earning more pay, but it also could push employers to offer more competitive pay and benefits to retain them, experts said.
Noncompete agreements are already banned in California, North Dakota, Oklahoma, and Washington, D.C., but the new federal regulation would bar them nationwide. Some other states restrict how they’re enforced, often designating a minimum salary for employees subject to a noncompete.
Pennsylvania doesn’t require a minimum salary to uphold a noncompete agreement, though state courts have found reasons not to enforce them in some instances. An employer that tries to enforce a noncompete by suing the former employee often has to show a legitimate business reason for the arrangement.
It’s difficult to know exactly how many workers are bound by valid noncompete agreements. Workers themselves are often unsure whether they agreed to one, experts said, and many employers hold back from enforcing them because it’s not worth the effort, or they worry the agreement could be struck down in court.
Wayne Stansfield, a lawyer at Reed Smith who represents employers, estimated that more workers are bound by noncompetes in Pennsylvania than the national average.
“They really permeate all types of industries,” Stansfield said, particularly in roles that require direct relationships with clients or customers, such as sales or consulting.
In the Philadelphia region, the proposed change could be especially significant in the pharmaceutical and biotech industries, Abrams noted, because many employees have access to valuable trade secrets. Still, he noted, these companies are likely to respond by using stronger nondisclosure agreements, which keep employees from sharing confidential business information.
An Economic Policy Institute survey from 2019 estimated that 42% of workplaces in Pennsylvania require some or all of their employees to enter noncompete agreements.
State lawmakers have made some effort to change the rules. A bipartisan group of state representatives sponsored a bill in the last session that would have prohibited noncompete agreements for health-care workers. The bill, which ultimately died in September, cited a shortage of health-care workers and the high level of education debt faced by many of them as a financial stressor adding to the shortage.
Asked about the FTC’s proposal, Silas Russell, political director of SEIU Healthcare Pennsylvania, noted the proliferation of noncompete agreements.
“Health-care workers go where we’re needed most, and noncompete clauses only serve to keep experienced caregivers from the patients, residents, and consumers who need us,” Russell said in an email. “The best way for an employer to keep a worker is to offer the wages and benefits those workers deserve, not threaten to sue them for seeking a better opportunity.”
For those who watch employment issues closely, the FTC’s move was unsurprising. In 2021, President Joe Biden signed an executive order calling for a ban or limitation on noncompetes as one of several measures to curb anticompetitive practices in tech and health care. Before announcing its rule change, the FTC took its first major step in this direction by taking legal action against three companies that had imposed unfair noncompete restrictions on their employees.
A lot of large companies have already dropped their noncompete clauses, said Lauri Kavulich, a Philadelphia-based employment lawyer at Clark Hill. Instead, they’re strengthening other parts of their employment contracts, such as nondisclosure agreements and nonsolicitation agreements, which bar ex-employees from soliciting the company’s clients.
Jessica Gomez, an HR consultant at One Digital in Philadelphia, said that even her local small-business clients are increasingly hiring people outside Pennsylvania, sometimes in states where noncompete clauses are limited, now that remote work has become common because of the COVID-19 pandemic.
Stansfield said nonsolicitation agreements may also face additional scrutiny if the FTC’s proposed rule goes into effect as it’s currently written because the FTC’s definition of what would constitute a noncompete is broad.
The rule will be subject to public comment and may be revised before it becomes final. Even then, it’s likely to face challenges from those who say it’s bad for businesses, creating an unmanageable workload for employers who will have to rewrite agreements and notify current and former employees of the changes.
“Smaller companies don’t necessarily have the legal resources that larger companies do,” said Gomez, the HR consultant, whose clients sometimes have no internal HR staff. “It will be more time-consuming for them to figure out what exactly is needed.”
Still, the proposed rule could slow enforcement of noncompete agreements. Courts were already applying more scrutiny, Stansfield said, and may do so more earnestly even before the FTC finalizes its regulation.
That could cause employers to think differently about whether to pursue ex-employees for violating their noncompete clause. It’s also unclear what would happen to pending noncompete cases while the regulation’s fate is sorted out, Stansfield added.
Worker mobility may not boom right away, Abrams said, but some companies could become more bold in recruiting.
“Any kind of change takes a while to filter into people’s consciousness and acknowledge that you can leave a little more easily,” Abrams said. “Other firms, competitors, may get aggressive a little more quickly.”