BAM Key Details:

  • On Tuesday, April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 for a nationwide ban on non-compete agreements, which is set to go into effect 120 days after its official publication in the Federal Register. 
  • The FTC expects challenges from business groups, primarily to protect company secrets and intellectual property. 
  • The U.S. Chamber of Commerce pledged to sue the agency within hours of the vote. 

If the FTC gets its way, the non-compete clause will become a thing of the past. 

The Federal Trade Commission voted 3-2 to ban non-compete agreements on Tuesday, April 23rd—a rule now slated to go into effect nationwide 120 days after its official publication in the Federal Register. 

The U.S. Chamber of Commerce pledged to sue the agency within hours of their vote. And other business groups are expected to challenge the ruling. 

So, what are the arguments for and against non-competes? And how could this decision impact the real estate industry? 

Do the cons of non-competes outweigh the pros?

Companies across the U.S. include non-compete agreements in employment contracts to prevent employees from taking jobs with the competition. According to FTC estimates, about 30 million American workers (roughly 18%) are subject to a non-compete. 

While the FTC has ruled in favor of a nationwide ban on these agreements, they fully expect challenges from businesses that stand by their use of non-competes. 

The U.S. Chamber of Commerce wasted no time in making their opposition known. 

If the new rule goes into effect, it will not only prohibit new non-compete agreements but will also force businesses to scrap any existing non-competes for all employees except senior executives in policy-making roles who earn more than $151,164 annually. 

President Joe Biden said Tuesday— 

“Workers ought to have the right to choose who they want to work for.” 

Non-compete provisions can prevent employees leaving a company from working with any other business in the same industry—at least for a set period of time—regardless of whether they’re leaving in pursuit of higher pay, a better career opportunity, or a more suitable location. 

Federal Trade Commission Chair Lina Khan said the following in a press release: 

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned.” 

Business groups opposing the new rule argue that non-compete agreements are necessary to safeguard intellectual property and company secrets, which an ex-employee might share with a competitor. 

In response to that argument, the FTC suggests using other means, including a non-disclosure agreement rather than a non-compete, which limits an employee’s career options (sometimes for several years) if they choose to leave the company or are terminated for one reason or another. 

The non-compete ban is part of a larger crusade

The idea of a national ban on non-competes is nothing new. The FTC originally proposed it over a year ago in January 2023. Since then, it’s received more than 26,000 comments. And according to the agency, the vast majority of those comments expressed support for the ban. 

The FTC argues that non-compete agreements can severely limit promising job opportunities for contractually-bound ex-employees—thereby impacting the efficiency of the labor market—and can lead to “increased market concentration and higher prices for consumers.” 

For business trade groups, those risks pale in comparison to the danger of leaked company secrets and stolen intellectual property, which can compromise a company’s survival in a competitive marketplace—not to mention leave any business with proprietary knowledge at the mercy of ex-employees with an ax to grind. 

Non-disclosure agreements are made all the more enforceable when an employee agrees not to work for the competition (even if the only reason is a better compensation package). 

Tuesday’s vote is not an isolated incident. The FTC’s new rule is part of President Biden’s larger crusade against corporate giants and the rules that enable them to dominate their markets, often at the expense of employees and smaller businesses.

Over the past several years, the FTC, along with the Department of Justice’s (DOJ) antitrust division, has filed dozens of lawsuits to fight proposed corporate deals. 

In March, President Biden launched a task force on corporate pricing practices, led jointly by the DOJ, an independent agency, and the FTC. 

The president has repeatedly accused large corporations of anticompetitive practices that artificially prop up prices—partly to explain why inflation has been so sticky for the past several years. 

What impact could this have on the real estate industry?

Non-compete clauses are very common in real estate. Brokerages with proprietary knowledge and confidential client information understandably want to protect it. 

One way to do that is to ensure that agents leaving the brokerage cannot share that information with a competitor—or directly compete with them. 

A nationwide ban on non-competes, preventing new agreements and nullifying existing ones, could have real implications for brokerages across the country. 

That said, some brokerages and teams have taken non-competes to unreasonable extremes, preventing agents to going to another team or brokerage. 

BAM co-founder Byron Lazine noted that he’s seen two distinct ways non-compete agreements are used by brokerages and team leaders: with and without financial compensation. 

Sign-on bonuses are an example of why non-compete agreements can be reasonable. When a company offers a large financial incentive to a new employee, it’s understandable that they would want some assurance the employee will stay for a certain period. 

On the other hand, some leaders require their team members to sign agreements that restrict them from leaving the team for a set number of years. Unlike a sign-on bonus, there’s no additional financial compensation involved. These non-compete agreements limit a team member’s career opportunities without offering them anything in return. 

There should be a clear way for agents to leave—and leave with the business that they’ve brought in. They should be able to own all their self-generated leads. And there should be a clear exit plan on anything that’s under contract—who’s going to be compensated for what—depending on how the lead is generated. 

It should be easy for any agent to leave any team or any brokerage, unless they’ve accepted money in the form of a bonus to sign on. There should be a payback, or you need to fulfill whatever that term is. That’s where I think non-competes should have a place, like they do anywhere else, in any other industry where someone accepts money.

Byron Lazine

Real estate entrepreneur/coach and podcaster Jared James posted his reaction to the news on Instagram, calling the ban on non-competes a “big win for the American worker.” 

So, what do you think about non-compete agreements? If the nationwide ban goes into effect, will it impact your business?