weekly feature | May 1, 2024 |
Is this the end of noncompete agreements?

More than 30 million American workers are currently bound by noncompete agreements, which can prevent employees from changing firms or starting their own businesses. That’s set to change—if the Federal Trade Commission gets its way. The agency moved last week to ban noncompete clauses, arguing that they lower wages for workers who are bound by them as well as those who are not; and that they “prevent new businesses from forming, stifling entrepreneurship, and prevent novel innovation which would otherwise occur when workers are able to broadly share their ideas.”

Noncompetes go back more than 200 years, and typically apply to a certain geographic area with the goal of preventing an employee from taking a company’s trade secrets to a rival business nearby, or quitting and opening a competing business of their own across the street. In design firms, noncompete agreements are sometimes included in boilerplate employment contracts alongside nonsolicitation agreements (a prohibition on poaching clients, and in some cases tradespeople or contractors) and nondisclosure agreements (which protect a firm’s intellectual property, client lists or other sensitive information).

Noncompetes are already prohibited in several states—California, North Dakota and Oklahoma have near-total bans on the agreements, as does Washington, D.C.—and are widely recognized as difficult to enforce in many others. Colorado, Maryland, Oregon and Rhode Island each have specific parameters for their use, like restricting them to high-wage earners.

The FTC’s ban would apply nationwide, overruling state statutes, invalidating the majority of current noncompete agreements and prohibiting all future ones across the board. The only exception is for existing agreements among senior employees, defined as those in policy-making positions earning more than $151,164 annually, as they’re more likely to have access to legal counsel and the ability to negotiate for more compensation in exchange for signing the agreement.

These days, noncompete clauses are still widely used by businesses in states that allow them, including California and New York. And while workers might not like the idea of signing away their rights, many see it as a norm of U.S. work culture, one in which companies tend to have more money, staff and legal power than individual employees. For employers, on the other hand, having such a clause might be viewed as a smart or useful measure from a legal perspective—one of those “better to have it than not” type details. Yet in the event that an employee violates their noncompete clause, many companies—including design firms—are uninclined to actually enforce the agreement.

After a challenging situation with a former contract employee last year, San Francisco–based designer Melanie Coddington consulted with her lawyer and added a series of policies to her contract, including noncompete and nondisclosure agreements. Similarly, when designer Blair Moore launched her Massachusetts firm in 2018, she asked all new hires to sign noncompete, nondisclosure and nonsolicitation agreements as a preventative measure. Yet when asked about the role the noncompete itself plays in protecting their businesses, both said it was the one clause they wouldn’t go to court over.

“There is language in the noncompete that basically says, ‘You can’t really work in this industry’ for two years from termination, which is ridiculous,” says Coddington. “Within the last three years, I’ve had two senior designers that did [go off on their own], and I’ve absolutely supported and helped them. You wouldn’t want to trap someone in employment with you—you want them to want to be here. [These agreements] are really just there to protect you if someone goes off the rails and does something weird.”

While Moore says she wouldn’t take legal action over a staff member violating their noncompete, she does find value in the conversation it prompts during the hiring process. “We talk through the contract with [prospective employees] point by point, just like we would with a client,” she explains. When she gets to the trio of agreements, it often prompts a meaningful discussion about the type of firm she’s building and the kind of employees who make a good fit—namely, those who want to put down roots at the firm.

“I’m not trying to ever stop someone from leaving, if they want to leave,” adds Moore. The conversation at the start—and the expectations it establishes—are the main goal of the noncompete. “I’ve found that if someone wants to leave, I’m usually finding a better person to replace them anyway—every single time, we hire a better person in that position than was here previously, and it helps us as a company move forward.”

While the FTC’s ban is technically set to take effect 120 days after being entered into the federal register, multiple lawsuits have already been filed in an effort to block the ruling. One of those comes from the U.S. Chamber of Commerce, which claims that the agency is overstepping its authority with the ban. “The Federal Trade Commission’s decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive,” Suzanne P. Clark, U.S. Chamber of Commerce president and CEO, said in a statement. “This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers and our economy.”

If the ruling goes into effect, its impact could take several years to be felt in the residential design industry. In commercial and hospitality sectors, and in areas like product development or sales, the effects may be more immediate and pronounced. “On one hand, it opens up a much larger talent pool, as employees will no longer be restricted from job-hopping to competitors after leaving a company,” posits Kenneth Roberts, principal of industry recruiting firm Interior Talent. For firms like his, he predicts higher placement volumes and the ability to fill jobs faster if the ruling stands. “The flip side is that companies may become more protective of their trade secrets and institutional knowledge. Some may resort to other tools, like nondisclosure agreements, to safeguard sensitive information such as project imagery and data on sales when employees depart. This could make the recruitment process more arduous if hiring companies scrutinize candidates more intensely.”

For now, Roberts advises companies to adapt their strategies and value propositions. “The focus on company culture will be paramount” in retaining employees, he says—as well as enhancing their data security during job transitions.

Designer Dennese Guadeloupe Rojas also recommends tapping an employment lawyer to review and enhance employee contracts—a move she made for her Washington, D.C.–based firm. “You should have everyone you deal with sign something,” she says. “You don’t know what their intentions are, but you’re protecting your brand and your business.”

If the ban does go into effect, employers won’t be left helpless. In its ruling, the FTC expressly notes that nondisclosure agreements and client or customer nonsolicitation agreements remain legal. Cheryl Kees Clendenon, a designer based in Pensacola, Florida, has long preferred these methods over a noncompete. “We have had these in place for my firm of eight employees for many years, because in a smaller market, loose lips can definitely sink some ships,” says Kees Clendenon. “People have the right to work and be gainfully employed—but they cannot take what I have spent 23 years developing and honing for success. Go forth and conquer, but make your own way without the specific processes and documentation owned by my firm!”

While the ruling may cause her to update her contract and processes, Coddington hopes the conversation about noncompetes helps other designers realize that some of these provisions are important. “For me, it’s not so much this legislation that I’m concerned about—I’m concerned that other people are completely unprotected, like I was for the first 18 years of my business,” she says. “I was naive, and I didn’t think employees would try to do things like steal your clients. So maybe you don’t need a noncompete, but you definitely need other [forms of protection].”

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