The Rise and Fall of Non-Compete Clauses, Explained

This week, the US Federal Trade Commission issued a sweeping ruling that significantly restricts the use of non-compete agreements, dealing a major blow to what has become a key way for many fashion companies to retain talent.

Initially, non-compete clauses, which prohibited former employees from working for a rival for a specified period, were reserved for the fashion industry's most senior employees, such as creative directors and senior executives with unique skills and access to exclusive information, said Elizabeth Kurpis, a New York-based fashion lawyer.

However, over time, the use of non-competes began to grow. Fashion has begun to extend these restrictions to less experienced employees who pose little or no competitive risk, according to Kurpis. This mimics a trend seen in many industries: sandwich makers at fast-food chain Jimmy Johns were bound by non-compete clauses until the restaurant agreed to end the practice as part of 'a settlement in cases filed by the attorneys general of New York and Illinois in 2016. (It's rare for fashion store employees to be subject to it, recruiters and employment lawyers say.)

Yet rather than being used to protect company trade secrets and other creative properties, non-compete agreements have become a retention tool, intended to prevent employees at all levels from seeking new employment. job, said Caroline Pill, a partner at executive search consultancy Heidrick & Struggles in London. .

Critics say wider use can depress salaries and hinder career advancement. Noncompetes have sparked pushback from employees, as well as scrutiny from regulators and lawmakers. Before the FTC's decision, about 30 states had laws limiting noncompetes based on factors such as salary, industry, and length of employment. California categorically prohibits them.

Here BoF explains how the ban would affect fashion companies and their employees.

What did the FTC do?

The FTC issued a final rule this week prohibiting companies from entering into new noncompete agreements or enforcing existing agreements for all workers. The rule will not override existing noncompete agreements for senior executives (who the FTC says represent less than 1 percent of all workers) in decision-making positions earning at least $151,164 per year.

The rule is expected to take effect in August, 120 days after its publication in the Federal Register, a process that could be delayed due to backlash from business groups and individual companies. In the days since the decision, the regulatory agency has already been the subject of at least two lawsuits, including one filed this week by the U.S. Chamber of Commerce challenging the agency's authority to impose such a prohibition.

For its part, the FTC estimates that its new ban would free up career opportunities for approximately 30 million workers in the United States subject to non-compete rules.

In some ways, the rule catches up with incremental changes in the legal and business landscape; many non-competes exist purely on paper and would be difficult, if not impossible, to enforce legally.

The tight post-pandemic job market has also given employees more power to object to non-compete clauses. Employers also fear being seen as an obstacle to career advancement if their employment contracts are too restrictive.

How common are non-compete agreements in the fashion industry and how do they work?

Such agreements have long been standard practice embedded in contracts for fashion houses and luxury conglomerates, as well as mass retailers and sports brands, according to Kurpis.

In sports, where brands like Nike, Adidas and Under Armor rely heavily on proprietary innovations (such as Nike's flyease technology and Adidas primacool in certain sneaker designs) and maintain top-secret contracts and endorsements with celebrities and professional athletes, requiring executives to make non-compete agreements (and similar non-disclosure agreements or NDAs) an integral part of their business operations, Kurpis said.

Typically, these agreements do not categorically prohibit individuals from joining a rival company. Instead, they impose a break between employers, which typically lasts three months to a year.

At luxury brands, this time is crucial for creative directors and executives so you don't turn to a competitor knowing what awaits you on the runway, said Paula Reid, president of the executive search firm. Reid & Co.

Although rare, there are cases where non-competes have benefited fashion designers.

In some cases, an employer may agree to pay compensation during this cooling-off period. In 2016, Hedi Slimane successfully sued Kering, hoping to have its non-compete enforced, arguing that he was owed $13 million after leaving Saint Laurent, on the condition that he not work for another house for a period of time. fixed period. But these accommodations are not guaranteed and are less likely to be available to mid- or junior-level workers.

How would the ban affect the fashion industry workforce?

For workers in mid- and lower-level positions, the non-compete ban could open up their career prospects and allow them to pursue opportunities including higher salaries, more attractive job titles, and a better work environment. more welcoming than non-competes (even when not actively enforced) could have prevented, Reid said.

The existence of a non-compete has long been enough to prevent many fashion workers from seeking employment at rival companies where their skills and passions are most likely to match.

People would sometimes say these non-competes won't be enforced, Reid said. But the problem is, every time someone looks for another job, accepts an offer, or gives notice, they hold their breath.

For companies, the mere insinuation that someone may have signed a non-compete clause is often enough to reject a job offer or exclude an employee from even interviewing, Pill said.

How can businesses adapt to the ban?

The FTC has outlined several alternatives that employers can use to protect sensitive or proprietary information. Among them are trade secret laws and nondisclosure agreements. In the United States, about 95 percent of workers with non-compete agreements already have an NDA, the FTC said.

It is important to note that the FTC's non-compete ban would only apply to individuals classified as workers or employees of a company in the United States. In other words, non-competes will still be in effect, at least for now, in certain sectors of the fashion industry, such as manufacturing and distribution agreements, Kurpis said. For example, a factory may be prohibited from making products that compete with the company it currently manufactures for, both during their collaboration and after their partnership ends, she said.

Ultimately, the U.S. decision could impact how Europe views its non-competition clauses, Pill said.

Obviously every country is different and some countries are more employee or employer friendly depending on where you are, but it's certainly a welcome change, she said.

In its comments on the ban, the FTC said it believed the decision would encourage companies to compete to retain workers based on their working conditions.

It's a good thing that the onus is on employers to know that they are challenging, empowering and developing their talent, that they are continuing to grow and that they don't need to go elsewhere to do it, Reid said.