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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.
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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:
The rule prohibits the creation of new noncompete agreements with any workers, including senior executives, once it becomes effective.
Entering into noncompetes with any workers after the effective date is considered an "unfair method of competition," violating Section 5 of the FTC Act.
Noncompete agreements that are already in place with senior executives can remain active.
For all other workers, existing noncompete agreements will not be enforceable after the rule takes effect.
The FTC has outlined multiple anticipated benefits stemming from the enforcement of this rule. Here are the top four:
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:
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.
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.
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.
The annual rate of new business creation is expected to increase by 2.7%, translating to over 8,500 additional new businesses each year.
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.
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.
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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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:
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:
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.
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.
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.
Compete for talent through better wages, benefits and career development opportunities, rather than restrictive legal measures.
Ensure that all employees are informed about changes to their contracts and the new landscape of employment law.
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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:
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.
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.
Develop more robust employee retention programs. This could include competitive salary packages, career development opportunities and positive workplace culture enhancements.
Clearly communicate with your current and former employees about the changes to their contracts and what it means for their career mobility.
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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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