What the FTC non-compete ban means for your business

On April 23, 2024, in a document more than 500 pages long, the Federal Trade Commission announced its final rule banning businesses from issuing non-compete agreements to their workers and overruling existing non-competes. Only a week after it was announced, the rule already faced significant legal challenges from businesses and policymakers alike.

That said, businesses will need to change and adapt in order to avoid hefty penalties—while also protecting their best interests. Employees and contract workers, on the other hand, may enjoy unprecedented freedom to move between employers and clients.

Key takeaways from the FTC's final rule

At face value, the FTC's final rule prohibits any business entity from creating or enforcing non-competes, with few exceptions. Understanding that rule starts with a few key pieces of information:

• How the FTC defines a non-compete clause: Though broad, the FTC essentially defines a non-compete as an agreement that unfairly restricts a worker from seeking or accepting work with a business' competitors.
• What the ban covers: In its current form, the ban applies to all workers except so-called "senior executives" and most business sales.
• Hurdles the ban will face: Because of its broad scope and influence, organizations such as the U.S. Chamber of Commerce have already contested the ban.

Immediate steps for businesses to take

Before anything else, businesses should adjust processes to ensure compliance with the ban. While experts expect the ban to go into effect on August 21, 2024, taking the time now could prevent lawsuits and penalties in the future.

Inform employees of the change

For employees who currently have a non-compete clause as part of their employment contract, businesses do not need to draft new contracts. Instead, the business must provide clear and conspicuous notice that the non-competes are no longer enforceable.

Keep in mind that this may not apply to certain senior executives who can still be bound by traditional non-competes.

Update contract templates

Although existing employee agreements won't require changes, it's crucial to adjust any contract templates you intend to use going forward. Attempting to bind a new employee, freelancer, or contractor with a non-compete clause (deliberately or through oversight) opens the door for legal problems.

On top of removing these clauses, however, businesses should also consider adding other clauses that are still permitted or boosting the strength of such clauses already in their employee agreements.

How businesses can adapt to the non-compete ban

Non-compete clauses have long been one of the best ways to protect a business entity's operating assets, such as proprietary information or client relationships. Now that they're no longer allowed, businesses will need to adapt to stay secure.

1. Double down on NDAs

Similar in many ways to non-competes, non-disclosure agreements are legally binding contracts that control significant aspects of how employees can share confidential or proprietary information. Typically, these agreements remain in effect even after employment ends and are a crucial way to protect trade secrets, client information, and corporate strategy.

2. Consider non-solicitation agreements

Where non-competes prevent former employees from working for a competitor, non-solicitation agreements simply prevent those employees from "poaching" clients, customers, or other employees.

Essentially, including such an agreement in your employment contract serves as a compromise between an employee's right to work for whomever they want and your right to retain important members of your team and, of course, your clients.

3. Use intellectual property agreements

While these should already be a part of your employment contracts, consider leveraging intellectual property agreements more heavily to protect your business' intangible assets. Intellectual property clauses can be used to safeguard any work, patents, copyrights, or other creations produced by a worker during their time with an employer.

4. Invest in training and development

One of the best ways to protect yourself from the damage a former employee can cause is by never losing them in the first place. For this, studies have shown time and time again that investing in your employees' development is the key to reducing turnover and inspiring company loyalty.

Even in the event that employees still leave, those who had a positive experience with your company are far less likely to intentionally hurt your business as they go.

5. Add garden leave clauses

Although subject to certain restrictions, garden leave clauses are a powerful option for businesses hoping to limit the damage an ex-employee can cause. These clauses require a terminated employee to stay away from work during their notice period, though they still receive their pay.

While such a clause may not be needed when an employee leaves amicably, it can prevent a disgruntled former employee from accessing sensitive information or resources during their transition period to working with a competitor.

6. Rework exit interviews

When an employee leaves, it's crucial to understand the reason for their departure. This is where thorough exit interviews shine. Not only can these interviews give you key insights into employee mindset and your own work culture, but they can also help assess whether a departing employee is likely to move to a competitor or share sensitive information.

What the non-compete ban means for workers

While the FTC's final rule may mean headaches for business owners, it may offer unprecedented opportunities for certain workers. Specifically, the ban may help with:

• Greater career mobility: Without non-competes, employees can move more freely between companies within their industry without fear of repercussions.
• Higher wages: Mobility and wages are often linked, and many companies will look to attract the best talent with more generous compensation packages.
• More entrepreneurial opportunities: Workers will be free to start their own businesses or move to startups where they can make a greater impact.
• Increased legal protections: Corporations have historically held the power in non-compete cases—something that will no longer be true after the ban takes effect.
• Improved job satisfaction: Greater freedom, wages, and protections all promise to improve job satisfaction for employees, freelancers, and contractors.

What comes next for businesses and the ban

Currently, experts believe that the FTC's non-compete ban will take effect sometime in August of this year. Even so, the outpouring of protests and challenges from organizations such as the U.S. Chamber of Commerce will likely delay this date for months, if not years.

Throughout these delays, the process allows for a public comment period where business owners and other citizens can express concerns with specific portions of the rule. Additionally, federal procedure is extraordinarily precise with a ruling this broad, and bureaucratic hangups may add to delays.

Still, it's important for business owners to stay ahead of the game where federal regulations are concerned. Those looking to minimize the disruption caused by this ruling may want to adjust processes, contracts, and even company culture in order to mitigate risk. Done correctly, this kind of preparation may even help businesses get ahead of less agile competitors.

FAQs

Why is the FTC banning non-competes?

At the core of the FTC's ruling is their belief that non-compete agreements are an "unfair method of competition" that wrongly restricts workers in an attempt to increase the business' security and profits. By banning such agreements, the FTC hopes to give workers more freedom and job mobility.

Will existing non-compete agreements still work?

No, the FTC ban will effectively invalidate all existing non-compete agreements except those qualifying for certain exceptions.

Are there any exceptions to the proposed rule?

While the ban is broad in scope, it does allow exceptions for so-called "senior executives." The FTC defines a senior executive as an individual making a total annual compensation of $151,164 or more who is in a policy-making position within the company.

Additionally, the ban allows an exception for a "bona fide sale," such as the sale of a person's ownership interest in a company.

When will the FTC non-compete ban take effect?

Experts expect that the FTC's non-compete ban will officially take effect 120 days after its publication in the Federal Register, which is a sort of legal gazette outlining new pieces of legislation and regulations. In this case, this date should be Aug. 21, 2024.