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FTC's noncompete ban could increase turnover in tech

The FTC noncompete ban could drive higher quit rates, affecting innovative sectors like technology. Experts say HR managers must balance talent gains with potential staff losses.

Experts anticipate the U.S. Federal Trade Commission's ban on noncompete agreements will increase quit rates. Although the ensuing resignations might not match those of the Great Resignation, which caused quit rates to skyrocket, they could still be significant enough to be reflected in labor data.

For HR managers, the FTC noncompete ban holds promise and peril. Studies show that noncompete agreements, which apply to as many as 20% of U.S. workers, have their highest concentration in innovative industries, especially for people with in-demand skills such as engineering.

Gartner surveyed about 60 HR leaders after the ban last month and found that 62% said their organizations would benefit from increased talent availability. However, 51% also worried they were at risk of losing valuable talent.

"It represents a promise to open up the labor market that has been historically tight," said Dion Love, an analyst at Gartner.

The final noncompete rule was published to the Federal Register on Tuesday and will take effect on Sept. 4.

The FTC's final rule cites more than 20 academic studies on the consequences of noncompete agreements. The FTC concluded that noncompete agreements suppress worker wages, restrict worker mobility and deter competitive activity. The FTC's proposal received more than more than 26,000 public comments.

Among the academic works cited is a study co-authored by Tony Tong, a professor of strategy and entrepreneurship at the Leeds School of Business at the University of Colorado. His study found that increasing enforcement of employee noncompete agreements increases the attractiveness of companies as acquisition targets. If a lot of employees are expected to leave, the acquisition is less attractive to the acquirer.

Freedom to be mobile

Tong said he expects a moderate increase in employee mobility due to the FTC ban. But it could also encourage more startup activity while prompting established companies to develop ways to retain employees.

It represents a promise to open up the labor market that has been historically tight.
Dion LoveAnalyst, Gartner

"I think this is a win for employees in general," he said.

Tong said new graduates might especially benefit from the FTC noncompete ban as it will allow them to explore multiple job opportunities before committing to an employer. "It's better for them to get experience in different companies."

Matthew Johnson, an assistant professor at Duke University's Sanford School of Public Policy, co-authored a different study revealing that innovation significantly declines when noncompete agreements are more strictly enforced.

In an email, Johnson said findings indicate that a noncompete agreement ban "would indeed increase worker job-to-job mobility, particularly in industries in which noncompete agreements are frequently used."

The paper stated the users most affected by the ban will be those working in high-skill occupations, such as engineering and technology.

Patrick Thibodeau is an editor at large for TechTarget Editorial who covers HCM and ERP technologies. He's worked for more than two decades as an enterprise IT reporter.

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