The noncompete agreement ban: what you need to know

The Federal Trade Commission (FTC) has made a groundbreaking decision that will significantly affect employees and employers across the United States.

The FTC has decided to limit the enforceability of most noncompete agreements in employment contracts, except those applicable to senior executives.

The FTC defines senior executives as workers earning more than $151,164 annually who are in a “policy-making position.”

Noncompete agreements for regular employees, such as those in sales or marketing or engineering teams, will no longer be enforceable.

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The background

Noncompete agreements were once limited to highly paid executives to prevent them from sharing confidential information with other companies.

However, in recent years, such agreements have become more common in lower-paying jobs such as fast-food workers, yoga instructors, and maintenance workers.

These agreements can prohibit workers from taking a job with a competitor, starting their own business, or even working in the same industry for a set period after leaving their current job.

They can sometimes be so broad that they prevent workers from finding new employment in their chosen field – thereby limiting their career options.

“The freedom to change jobs is core to economic liberty and a competitive, thriving economy,” says FTC Chair Lina M. Khan.

“Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

Employees will have more freedom to navigate the job market and explore new opportunities. The FTC believes that this change will provide more choices for employees and enable them to explore new places of work without the fear of being tied down by noncompete agreements.

However, it’s important to note that without noncompete contracts, employees may face increased competition and potential loss of job security.

What this means for you as an employer

In the current business landscape, employers are advised to be cautious about their restrictive covenants to ensure compliance with legal regulations. To safeguard their business interests, they should consider implementing appropriately tailored nonsolicitation or confidentiality clauses and limit trade secret access only to those who need it.

Employers who are concerned about the FTC rule, as well as broader legislative and regulatory efforts to restrict the use of noncompete agreements, may look into other options to protect their confidential information and business relationships. This could include nondisclosure and nonsolicitation agreements.

However, ensuring that these agreements comply with local, state, and federal laws is crucial.

The FTC hopes to encourage worker mobility, enhance competition, and stimulate innovation by limiting noncompete agreements. This decision will also benefit small businesses and startups, which often need help recruiting and retaining top talent due to their inability to offer competitive salaries and benefits.

Overall, this recent decision to limit the use of noncompete agreements in the US has been widely praised by experts as a significant move towards promoting competition and dynamism in the job market.

Noncompete agreements restrict employees from working for a company’s competitors for a certain period after leaving. While these agreements were originally intended to protect companies’ trade secrets and intellectual property, they have often been misused to limit workers’ mobility and bargaining power, resulting in reduced wages and stunted career growth.

The rule will take effect 120 days after publication in the Federal Register, which if published now, makes it effective in late August 2024. Publication typically happens several days after approval – however, legal challenges may delay enforcement. Business groups led by the US Chamber of Commerce have already taken legal action.