The New FTC Noncompete Ban Explained: Key Points for Employers

By Jeanette Coleman, SPHR & SHRM-SCP on Apr 25, 2024
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The Federal Trade Commission (FTC) has issued a groundbreaking final rule that will reshape the use of noncompete agreements across the U.S. labor market. As a certified professional employer organization (PEO) serving small and mid-sized business owners in Kansas City and beyond, we are keenly aware of the concerns and challenges the FTC noncompete ban may pose. 

This blog post will explain the details of the FTC's current decision and explore its implications for your business and offer strategic guidance on how to navigate this change effectively.

RELATED: Pregnant Workers' Fairness Act - From Policy to Practice >>

Understanding the Final Rule: FTC Noncompete Ban

Effective 120 days after its publication in the Federal Register, the FTC's final rule prohibits the use of noncompete clauses for most workers, including employees, independent contractors and unpaid workers such as interns and volunteers. 

This policy shift is intended to enhance worker mobility and foster a more dynamic and competitive business environment by preventing the restrictions that noncompete agreements impose on workers’ career movements.

As with any significant regulatory change, the FTC noncompete ban is expected to face legal hurdles. The U.S. Chamber of Commerce has expressed intentions to challenge the rule, arguing that it may overstep the FTC's authority. This anticipated legal battle means that the implementation of the noncompete ban could be delayed as the courts review its legality.

As it stands today, the FTC noncompete ban introduces significant restrictions on the use of noncompete clauses in employment agreements and includes the following:

1. Ban on New Noncompetes

  • Effective date 

The rule prohibits the creation of new noncompete agreements with any workers, including senior executives, once it becomes effective.

  • Legal basis 

Entering into noncompetes with any workers after the effective date is considered an "unfair method of competition," violating Section 5 of the FTC Act.

2. Treatment of Existing Noncompetes

  • Senior executives 

Noncompete agreements that are already in place with senior executives can remain active.

  • Other workers 

For all other workers, existing noncompete agreements will not be enforceable after the rule takes effect.

3. Definition of Senior Executives

  • The rule specifies that "senior executives" are those who earn more than $151,164 annually and hold a policy-making position. This group constitutes less than 1% of the workforce under the scope of the rule.

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The FTC has outlined multiple anticipated benefits stemming from the enforcement of this rule. Here are the top four:

Reduced Healthcare Costs

It is estimated that the FTC noncompete ban will reduce spending on physician services by up to $194 billion over the next decade through heightened competition, improved operational efficiency, and decreased legal and administrative costs. 

Here’s a deeper look at how that may be achieved:

  • Increased competition

The ban allows physicians to move freely between employers, which can lead to increased competition among healthcare providers. This competition might pressure healthcare facilities to improve efficiency and innovation, potentially reducing overall costs.

  • Labor market fluidity

With increased job mobility, healthcare facilities may need to offer better conditions, including fair pricing practices, to attract and retain staff. This can indirectly lead to more competitive pricing in services as facilities seek to pass on savings to attract more patients.

  • Reduced administrative and legal costs

Noncompete agreements often lead to legal disputes and administrative burdens associated with enforcing or contesting these clauses. Eliminating these agreements can reduce such costs, potentially lowering overall operational expenses for healthcare providers.

Increased Rate of Business Formations

The annual rate of new business creation is expected to increase by 2.7%, translating to over 8,500 additional new businesses each year.

Enhanced Innovation

The rule is projected to generate between 17,000 and 29,000 additional patents annually for the next ten years. In the first year alone, new patents could increase by 3,000 to 5,000, escalating to between 30,000 and 53,000 by the tenth year—a rise of 11-19% annually.

Boosted Worker Earnings 

Worker wages are projected to rise by $400 to $488 billion over the next decade, with an average annual increase of approximately $524 per worker.

While these projections suggest a boost in economic activity and worker earnings, they also indicate a potential increase in competitive pressures for existing businesses.

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Implications for Business Owners

The immediate effect for business owners, especially in sectors that rely heavily on noncompete clauses to safeguard their business interests, will be significant.

With the inability to enforce noncompete agreements, you may be concerned about protecting proprietary information, maintaining competitive advantages and investing in employee training without assurance of long-term retention. 

Additionally, the rule could lead to increased competition as employees are free to move between competitors or start competing businesses.

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Addressing Business Concerns & Fears

While the FTC noncompete ban is aimed at enhancing competition and employee freedom, it understandably raises concerns among business owners about safeguarding their intellectual property and investment in employee training.

However, the FTC suggests leaning on alternatives like confidentiality agreements and trade secret laws, which can provide protection without the broad restrictions of noncompetes.

Businesses worried about retaining talent and protecting proprietary information can focus on these:

Strengthening Other Forms of Legal Protection 

In the absence of noncompete agreements, employers can protect their business interests using alternative, narrower legal arrangements that focus on confidentiality, non-solicitation and anti-poaching. 

Here's a brief overview of each type of agreement:

  • Confidentiality (or Non-Disclosure) Agreements 

These agreements safeguard sensitive corporate information, such as trade secrets, proprietary data, intellectual property and information technology systems.

By signing these, employees commit to not disclosing or using this sensitive information for their own benefit or the benefit of others after their employment ends.

This helps ensure that critical business information remains secure, regardless of employee turnover.

  • Non-Solicitation Agreements

These covenants are designed to protect an employer's investment in their customer relationships and internal resources. They restrict departing employees from soliciting business from current clients, customers or patrons of the former employer for a specified period.

This kind of agreement is crucial not only for retaining valuable customer relationships but also often accompanies the transfer of business goodwill during mergers and acquisitions.

  • Anti-Poaching or Anti-Raiding Agreements 

These agreements are created to prevent former employees from targeting their ex-employer's workforce for recruitment purposes.

By preventing individuals from soliciting their former colleagues to join a new or competing business, these covenants help companies maintain stability within their teams and protect their human capital investment.

Employers looking to effectively implement these types of agreements should ensure they are precisely drafted to comply with relevant laws and achieve the intended protective effects without overreaching, which could lead to legal challenges.

Enhancing Workplace Attractiveness

Compete for talent through better wages, benefits and career development opportunities, rather than restrictive legal measures.

Communicating Transparently with Your Team

Ensure that all employees are informed about changes to their contracts and the new landscape of employment law.

RELATED: A Close Look at the 2024 Employee Handbook Updates >>

Staying Compliant and Competitive

The FTC noncompete ban will take effect 120 days after its publication in the Federal Register. This means businesses and individuals have a set period to adjust their practices and contracts before the new regulations become enforceable.

Here are four steps your business can take:

1. Review Existing Agreements 

Audit your current employment and contractor agreements to identify any noncompete clauses that will need to be rescinded or amended in compliance with the new rule.

2. Enhance Alternative Protections

Strengthen NDAs and consider implementing non-solicit and anti-raiding clauses where appropriate, which are not covered by the FTC's rule and can still protect your business interests by preventing former employees from poaching your clients and workforce. 

3. Focus on Retention 

Develop more robust employee retention programs. This could include competitive salary packages, career development opportunities and positive workplace culture enhancements.

4. Communicate Changes 

Clearly communicate with your current and former employees about the changes to their contracts and what it means for their career mobility.

RELATED: States with Pay Transparency Laws - The 2024 Guide >>

Preparing for the Future

As we look ahead, it's vital for business owners to remain adaptable and informed. The regulatory landscape for employment practices is evolving, and staying ahead of these changes will ensure that your business not only complies with new laws but thrives under them. 

Axcet HR Solutions is here to support you through the FTC noncompete ban, offering expert guidance on employment law compliance, strategic HR planning and effective workforce management.

For personalized advice and strategic planning tailored to your specific business needs, schedule a consultation with Axcet HR Solutions today.

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