In April, the Federal Trade Commission banned employers from initiating non-compete contracts. Now, employers are left to contemplate what their recruiting and retention strategies need to look like without them.
Under the new FTC rule, employers will be prohibited from entering into new non-compete agreements with workers, including independent contractors, starting in Aug. 2024. As for employees who are currently bound to non-competes, the new ruling also calls for employers to rescind existing agreements, with the exception of senior executives.
While several lawsuits have emerged challenging the FTC's ruling, if and when it's enforced, employers shouldn't have to make too many changes to their strategies, says Dan Russell, a partner and organizational psychologist at leadership consulting firm RHR International.
"We have to take a positive spin on this and use it as a way to communicate to folks that we value the contribution they give or will give to our organizations," Russell says. "We as leaders have to ask ourselves: If we can no longer force a person to stay or limit them from going to competitors, what should we do instead?"
Read more: The FTC's new non-compete ban is a wake-up call for employers
About 30 million people — from minimum wage earners to CEOs — are currently bound by non-competes, according to the FTC. Non-compete agreements, which can last anywhere from six months to two years, are designed to protect trade secrets and company relationships with specific clients by banning employees from leaving their company in favor of a competitor. The clause not only creates limitations for an employee moving within industries, but can limit their range of work within cities and entire states, too.
If left unchallenged, the FTC's policy change will be good news for employees' wallets: It's expected wages could increase nearly $300 billion per year by just allowing and encouraging employees to swap jobs freely. And while the potential drop in headcount may be daunting to employers, it's actually an opportunity to create a retention strategy that will benefit them long-term.
"[The ban] changes the conversation away from 'You can't leave,' which is adversarial, to one where employers are saying 'We see promise in you and we're willing to invest in it,'" Russell says. "Once [employees] see that a company wants to invest in them and work towards their growth and development, then they're going to be more likely to stay."
Organizations should also invest in rotational programs, special initiatives and networking opportunities so employees feel enticed to stick around. Leaders can facilitate open and honest conversations with current and prospective employees about what they need from the company, and how — and if — those needs can be met.
Read more: Chamber of Commerce sues to block FTC's non-compete ban
"Traditionally, companies have been wary of having transparent conversations in the past because they were afraid that employees would interpret that as a commitment to lifetime employment or a promotion," Russell says. "But what they're actually communicating is that they see a future for that employee, even if they can't promise what that future is."
Regardless of what the courts decide regarding the legality of non-compete agreements and the FTC's ban, Russell still urges employers to strongly consider moving away from them and toward a more personable approach. Employees' expectations of their workplaces have changed radically, and it will take a lot more than a contract to build a long-term and sustainable workforce.
"This should be viewed as just another arrow in the quiver of HR to increase commitment, loyalty and retention," he says. "If employees were valuable enough to be offered a non-compete, then they're valuable enough to have a candid and transparent conversation about why they're important. It's just the right thing to do."
