In A Future Without Non-Competes, Strategies For Talent And Innovation

Almost 20% of US workers are bound by non-compete agreements. And 98% of private employers require their executive and managers to sign NCAs as a condition of employment.

But in 2024, NCAs could become illegal and unenforceable. The Federal Trade Commission is scheduled to announce a decision on banning them in April. Given the extensive reliance on NCAs, how can firms prepare for their anticipated ban?

NCAs prohibit employees from working for a competitor or starting a competing business for a given period of time and within some limits, according to the US Government Office of Accountability.

For companies who say they rely on NCAs to protect trade secrets, client relationships, and talent investments, here are some alternatives that can achieve similar goals.

Lock In Your Trade Secrets, Not Your Workers

Traditionally, employers use noncompete agreements to stop employees from taking trade secrets – like proprietary software, unreleased product information, strategic plans, and customer lists – to a competitor. To avoid knowledge loss when NCAs become unenforceable, firms could focus on securing the actual knowledge they seek to protect.

Patent filings, for example, formally and legally protect inventions, especially when firms file patents before workers walk out the door. California firms massively engaged in this strategy when NCAs were outlawed in the state, according to study from University of Southern California and University of Toronto.

Some firms opt, instead, for secrecy. This involves considerable investment and effort. Firms might split different pieces of their innovation efforts across various R&D labs and researchers, such that only a select number of people understand how they all fit together. This is apparently how Apple safeguarded their projects.

Other secrecy options may involve limiting or careful securing access to sensitive data and information and bolstering confidentiality agreements. Some firms even find ways to personalize information they share with employees, so that they can quickly track down and punish the source of a leak.

Leverage Rivalries And Alliances

Firms are especially concerned that – absent NCAs – rivals may lure their best employees with attractive job offers. But, used effectively, rivalry can actually help firms retain their talent or at least avoid losing too much knowledge to competitors, research shows.

In contexts of intense rivalry, employees are reluctant to “join the enemy” or their enemies’ allies because they feel strongly connected to their own firm. For example “out of 100,000 Boeing employees and 40,000 Airbus employees on LinkedIn, only 240 have worked at both companies”, the research found. Given the non-enforceability of NCAs at many of these companies’ locations, this suggests rivalries help avoid knowledge leakage and talent drain.

Businesses can encourage loyalty by differentiating their purpose as more positive and valuable than their rivals’. Promoting professional norms of conduct around the inappropriateness of knowledge transfer, especially to the “enemy,” can also help avoid knowledge loss to a competitor, the research found.

In addition, employee departures can open possibilities for collaborative projects with new partners. Analyzing 42 global pharmaceutical firms over 16 years, researchers at ESMT Berlin and Tilburg University reveal a systematic link between inventor mobility and the formation of alliances after their moves.

After they leave, workers stay in touch with prior coworkers. They may also see possibilities for projects that may benefit their old and new companies and are in a good position to broker beneficial alliances.

Review Your Talent Strategies

If a ban on NCA passes, average earnings among all workers could increase by 3.2% to 14.2%. This is according to researchers from the FTC, and Duke and The Ohio State universities who looked at what happened to wages between 1991 and 2014 as a consequence of NCA enforceability.

While one might expect that employees who sign NCAs can negotiate higher raises in return for their loyalty, the research suggests otherwise. People with NCAs often have lower salaries, especially women and Black workers, the researchers find. So, eliminating NCAs is likely to cause salary readjustments.

The banning of non-compete agreements could also reshape the dynamics of talent acquisition and competition in the war for talent.

The use of NCAs in an industry causes firms to hire more unexperienced people or folks with less directly relevant skills. It’s not just that skilled and experienced NCA-bound workers are unwilling to relocate or change industry. Employers hesitate to hire competitors’ talent, too, for fear of repercussions.

If NCAs become unenforceable, talented, and skilled workers will become more mobile. Firms that can secure the loyalty of their top talent and attract NCA-trapped workers from other firms can gain an edge in the war on talent. Strategies like focusing on a firm’s distinctive purpose could help in these efforts.

Understandably, firms will still want to reap their investments in training and developing employees. But alternatives to NCAs can achieve the same goals. Under some conditions, firms can put a price on the investment they make in employees and require reimbursements if they leave before the firm has recouped the investment. Alternatively, many firms offer tuition reimbursement plans.

Looking Ahead

The FTC’s decision is uncertain and – if it passes – likely to be challenged. But state-level legislation banning or severely constraining is expanding : Colorado, Minnesota, North Dakota, and Oklahoma have joined California in virtually outlawing NCAs. And other regulatory and legislative bodies are challenging the legality and enforceability of these binding agreements. So – regardless of whether the FTC ban comes to be – firms would be well-served to examine how else they might lock in their trade secrets, build strong corporate cultures, and acquire and develop the talent they need.

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