FTC Bans Noncompete Agreements in Most Cases

On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule banning noncompete agreements for most workers nationwide. This new regulation, which takes effect 120 days after its publication in the Federal Register, brings significant changes for both the labor market and the broader business landscape.

Read on to learn more about this transition and its implications for your business.

The Impact of Banning Noncompete Agreements

Noncompete agreements have traditionally been used by businesses to limit the ability of employees to join competitors or start competing ventures immediately after leaving a company. However, FTC Chair Lina M. Khan notes that such clauses “keep wages low, suppress new ideas and rob the American economy of dynamism.”

The FTC estimates that eliminating these agreements could result in the creation of over 8,500 new startups annually and lead to a 2.7% increase in new business formation each year. The ban is expected to enhance worker mobility and foster a more competitive labor market. This could translate into an estimated average earnings increase of $524 per year for workers.

Moreover, the rule is anticipated to lower healthcare costs by up to $194 billion over the next decade and potentially lead to 17,000 to 29,000 additional patents filed annually.

What Should You Do Right Now?

Based on the 120-day grace period mentioned above, the ban officially takes effect Aug. 21, 2024. That’s not much time to prepare. If you use noncompete agreements at your organization, you should take the following steps immediately.

Review and Revise Employment Contracts

Existing noncompete agreements will no longer be enforceable for the vast majority of workers. However, agreements for senior executives (defined as employees earning over $151,164 annually and in policy-making positions) can remain under certain conditions.

Communicate Changes Effectively

Employers are required to notify workers bound by existing noncompete agreements that these agreements will not be enforced moving forward. The FTC has provided model language to aid in this communication, ensuring clarity and compliance.

Explore Alternative Protections

Understandably, concern remains on how to safeguard proprietary information and maintain competitive advantage without noncompete agreements. To ease this risk, consider strengthening your non-disclosure agreements (NDAs) and utilizing trade secret laws. These tools are effective—yet less restrictive—ways to protect sensitive business information.

Strategic Recommendations

Once you complete those immediate steps, consider your long-term approach under the new rule.

Emphasize Other Retention Strategies

In the absence of noncompete agreements, focus on other strategies to retain top talent. This includes enhancing workplace conditions, offering competitive compensation packages and providing opportunities for career development and advancement.

Innovate to Stay Competitive

The FTC’s ruling is geared towards boosting innovation and economic dynamism. Embrace this opportunity by encouraging innovation within your teams. Support new ideas and ventures that could lead to business growth and diversification.

Prepare for a More Dynamic Job Market

With the abolition of noncompete agreements, we’ll see increased employee mobility (even more than now!). This means you’ll need to do more to retain your current employees. But it’s also an opportunity to attract new talent and ideas from elsewhere and bring them into your organization. Review your current culture and policies to increase employee engagement and make your workplace where they want to be.

The FTC’s decision to ban noncompete agreements marks a significant shift in how businesses will operate and compete for talent. While it poses challenges, it also offers numerous opportunities for innovation and growth.

By taking the necessary steps under the new noncompete agreements rule, you’ll ensure your business not only complies with the new regulations but thrives under them. Stay informed, stay agile, and stay in touch with your HR partners. We’re ready to support you in adapting to these changes effectively.

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