On April 23, 2024, the FTC issued a new ruling that will have far-reaching impacts on businesses of all sizes. The FTC has officially banned non-compete clauses in employment contracts. In the past, businesses have used these clauses to protect their internal operations by preventing their former employees from ‘competing’ against them.
However, the FTC ban on non-competes will force businesses to reconsider their employee retention strategies and contract structures. Business owners and HR departments should carefully evaluate this non-compete clause update to ensure they are prepared and compliant.
Update (August 20, 2024): The FTC’s nationwide ban on noncompete agreements, which was set to take effect on September 4, has been blocked by a federal judge in Texas. Judge Ada E. Brown ruled that the FTC overreached in its attempt to ban noncompetes broadly, rendering the rule invalid. For now, noncompete agreements will remain enforceable under current law. The FTC is considering an appeal, but this ruling provides businesses with reassurance that they can continue to rely on noncompete agreements while the legal landscape continues to evolve.
Overview of the FTC Ban on Non-Competes
The FTC ruling on non-competes included several different reasons for the policy shift. In its own words, the ban was designed to “promote competition [...] protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.”
The FTC members who studied the impact of these non-compete clauses in contracts say this shift will have far-reaching positive consequences. The FTC reports that the clauses hinder employee mobility, innovation, and business development. Therefore, they believe that the changes to non-compete agreements will improve the overall business environment in the country.
Those in favor of the ban expect that outlawing these clauses will help generate new businesses because non-competes will no longer hold back potential entrepreneurs who may have signed earlier in their careers when they were getting started in their industry. Proponents also say that the ban will improve worker wages because employers must find better strategies to retain employees and keep them interested in working for the organization. This will encourage businesses to treat employees well in their benefits packages.
Employers should note that while the FTC ruling prohibits non-compete clauses in most instances, it does permit them to be retained in a few select situations. Essentially, existing non-competes for senior executives can remain in force, but new non-competes for people at all levels of the business cannot be issued. Therefore, businesses need to consider how they build their workforce and encourage loyalty from the newest employee to the highest-ranking executive moving forward.
Impact on Small and Medium Businesses
The FTC ban on non-compete clauses will have varying impacts on small and medium businesses.
The non-compete ban will benefit employees by making it easier for them to move between businesses, which can open the market for potential employees that small businesses can seek. The FTC also anticipates that the ban will make it easier for new entrepreneurs to start their own businesses, which can increase the number of small businesses starting each year.
However, businesses must carefully examine their employee contracts and retention strategies. Without non-competes to discourage employees from moving to other businesses, small businesses might need to get creative to encourage employees to stay with them.
Suppose they don't have the size and funds to offer higher wages or more appealing benefits packages. In that case, they might need to consider strategies like work-life balance and flexibility policies to entice employees. Speaking directly with employees to learn more about the benefits that matter to them can help companies structure plans that will appeal to their valuable employees.
Navigating Compliance and Strategic Adjustments
As businesses prepare for the new FTC ruling to go into effect, they will want to carefully evaluate their internal policies to ensure compliance with these regulations. However, companies will still want to ensure they take steps to protect their intellectual property from their competitors. Fortunately, there are still strategies that businesses can use to protect their internal secrets.
The FTC ban does not stop businesses from using non-disclosure agreements. Trade secret laws to protect sensitive information also remain in effect, which can help organizations protect any sensitive information. When these contract stipulations are combined with human resource strategies, such as flexible work hours and work-from-home policies, businesses can set themselves up to hold onto their valuable employees without losing them to their competitors.
Conclusion: Building Your Business Despite the FTC Non-Compete Ban
The FTC ruling on the ban on non-compete clauses will have far-reaching implications for many businesses. Companies have often used these clauses to protect their internal operations while also encouraging employees to remain with the business. Employees who left companies after signing non-competes might be limited in where they could work and their ability to start their businesses.
If you are a business owner or work in human resources, taking proactive action now can help you transition smoothly. Reviewing existing employee contracts and devising strategies to maintain employee retention can help you move forward confidently.
Understanding human resources, benefits, and payroll is not always easy. Fortunately, our team of experts is just a phone call or email away. Payday has been built from the ground up to help you focus on what matters for managing your business.