Potential FTC Ban On Noncompetes Could Mean 'Handcuffs Are Off' For Some Brokers
A potential Federal Trade Commission rule change that would ban noncompete clauses across the board in U.S. employment contracts would have ripple effects through the business world, including touching off a wave of change in CRE, where the clauses are often deployed, especially for top earners.
Noncompete clauses are pervasive in today’s commercial real estate landscape, with companies relying on them to keep top producers in their ranks and protect their client rolls and trade secrets. But a new push by the Biden administration to boost pay and employee mobility by doing away with the clauses could put an end to that, allowing brokers in particular to jump ship more easily.
“It's hard to overstate how significant this would be in terms of unlocking worker mobility, and allowing the U.S. to put its human capital to highest and best use,” said John Lettieri, president and CEO of the Economic Innovation Group, a public policy group focused on improving economic competitiveness. “I often compare this to a clogged artery, in that they artificially block the free flow of talent and ideas.”
Within CRE, this proposed rule change, based on the FTC’s broad antitrust powers, would make a difference. But experts disagree as to the extent with which this would change the industry, and top lobbyists aren’t yet sure how to approach the situation.
CRE Recruiting founder Allison Weiss said the rule might have significant impact on senior brokers and executives, as well as some of the more specialized roles within REITs that deal with financial engineering or structuring complicated deals.
“If you're someone at a higher level, at higher levels of experience, this is going to feel like the handcuffs are off,” she said.
The proposal is months from going into effect. After introducing the proposal last week, the FTC is seeking comments though March 10 as part of its typical rule-making process, after which the commission would make any adjustments and release a final rule. The agency estimates it would lead to 30 million Americans having better career opportunities, and increase overall wages by $300B annually. And it would be retroactive, meaning existing agreements would be void and firms would be required to inform current and past employees that they have been canceled.
However, if the rules are changed, the decision is likely to be challenged in court, which would delay the effects of any change until litigation is complete.
Bullpen CEO Tyler Kastelberg said the impact of the ruling, which will be a new positive for the economy on the whole, will be more muted in CRE.
“I don't really think it’ll end up changing too much in the industry,” he said. “The average job turnover in real estate jobs is something like 40% annually.”
Taken alongside recent state-level action to make salaries transparent on job listings, especially in states like New York, banning noncompetes would make the hiring and application more worker-friendly, and increase transparency.
Bisnow reached out to a handful of brokerages and industry groups to see if they had any thoughts or responses to the rule change. Both CBRE and JLL declined to comment, and NAIOP said they hadn't yet reviewed the proposal and had no response.
The National Association of Realtors, which represents both residential and commercial real estate interests, told Bisnow it is “still analyzing the rule and potential the impact it will have on the industry.”
According to Lettieri, these clauses, which he calls a “blunt instrument” to protect trade secrets, used to be very selectively utilized. But in recent decades, they have slowly become more widespread. Now, an estimated 40 million or 50 million workers, or 1 out of every 5 in the country, are covered by these agreements. He said these clauses have become incredibly unhealthy for the economy and there are other, less intrusive ways to protect technological secrets and business models, such as nondisclosure agreements. The use of noncompetes prevents an even playing field for workers, where the best employer would be able to attract the best talent, he said.
The current landscape varies by state, with some jurisdictions like California declining to enforce noncompetes. But according to Lettieri, even in states that don’t enforce, employers still ask workers to sign such agreements, which can have an intimidating effect on employees.
“Psychologically, it keeps people in their place,” Weiss said.
She believes that, in addition to freeing up more senior staff, this proposed ruling might have a potent impact on early and midcareer CRE workers. Many lower-level brokers are covered by 1099 agreements, and more senior executives or those in leadership who have noncompetes in their contracts tend to have the savvy and power to negotiate their way to better deals.
“If you're in your early career or midcareer, you feel like you have to abide by these things, even if it’s technically not enforceable in your state,” she said. “It's one of those mechanisms that people may leave our industry over. And we really need to retain people as much as possible, because we're not recruiting people at the rate that they're retiring or leaving the business due to downturns and market volatility.”
C-suite and executive workers tend to find work-arounds, or ways to abide by noncompetes if they’re strictly enforced. In New York, for instance, Weiss said many executives who leave for a competitor may be put on what’s called “garden leave,” taking six or so months off between jobs to abide by noncompetes. But that tends to be strictly limited to sophisticated, higher-level workers.
This shift may also change the way the company acquisitions work, according to Building Careers President Carly Glova. Often higher-level staff are incentivized to stay with a firm due to a noncompete, and eliminating those agreements may create more free agents when firms merge.
What tends to get a little tricky is when noncompete and nonsolicitation agreements overlap, when managers or leaders get poached, and then want to bring over members of their team. In that case, the new firm needs to avoid using the name of the new hire to attract other talent.
This situation recently played out in Dallas this fall, when a group of Cushman & Wakefield brokers moved to JLL, and the original firm filed a lawsuit, alleging the brokers in question violated a five-year employment contract forbidding noncompetition and nonsolicitation and protecting "highly valuable confidential information." A judge ruled the workers in question had to refrain from working for 14 days.
"This is a saber-rattling session to restrict and scare current Cushman & Wakefield employees from ever wanting to part ways with the firm," Jonathan Napper, one of the brokers, told CoStar. "Mike and I have been widely above board with our decision to leave and our intention to do the best by Cushman & Wakefield and their clients through this transition and we will continue to do so."
The Dallas case, and the multiyear contract, exemplifies the potential for career disruption these agreements have, Weiss said. Based on the letter of the law, those who sign these agreements and want to leave are presented with the choice of sticking with their current job, or taking months and maybe years off to change jobs and then return to their chosen industry, which can be incredibly disruptive to their income. A Colorado case from late 2021, involving three multifamily brokers who left Newmark for CBRE, resulted in a judge at one point declaring the trio couldn’t work in Colorado for a year. The case has resulted in a torrent of counterclaims and lawsuits.
“This is indicative of a command-and-control leadership style that says let's put handcuffs on people, let's do everything that we can to keep them in place and punish them if they leave,” Weiss said. “And I think a more progressive approach to leadership is ‘let's create an environment and circumstances and benefits and resources that are so good, people want to stay.’”
“We have to normalize the ability of employers to compete against each other,” Lettieri said.