Important Update – August 20, 2024: A federal judge in Texas, District Judge Ada Brown, has blocked a new Federal Trade Commission (FTC) rule that aimed to make it easier for employees to leave jobs and work for competitors. The judge ruled that the FTC had overstepped its authority and that the rule was “arbitrary and capricious,” causing potentially irreparable harm.
This decision prevents the FTC from enforcing the rule, which was set to take effect on September 4. However, the FTC can still address noncompete agreements through individual enforcement actions and may appeal the ruling.
While the FTC may try to appeal the decision, employers can breathe a sigh of relief for the foreseeable future.
What are noncompetes and why are they being banned?
Noncompete clauses have traditionally been used by employers to prevent employees from joining competing businesses or starting their own ventures within a certain period after leaving the company. These clauses have been criticized for stifling innovation, limiting workers’ ability to negotiate better wages, and reducing overall economic dynamism.
The FTC’s decision to ban noncompetes stems from findings that these agreements are an unfair method of competition. The final rule has two tiers.
Existing Noncompetes
For most workers, existing noncompete agreements will become unenforceable on September 4, 2024. Senior executives—defined by the FTC as those “earning more than $151,164 annually who are in a policy-making position”—can remain under their existing noncompete agreements indefinitely. These are estimated to be fewer than 1% of the workforce.
New Noncompetes
As of September 4, 2024, employers are prohibited from entering into new noncompete agreements with any workers, including senior executives.
Implications for small businesses
For small businesses, particularly those in competitive and rapidly evolving industries, the FTC’s noncompete ban could be a double-edged sword. On one hand, removing noncompete clauses from contracts means increased access to a broader talent pool. Small businesses can now attract skilled workers who were previously restricted. The FTC anticipates that banning noncompetes will boost innovation and the rate of new business formation, with the FTC estimating an additional 8,500 new businesses created each year as a result of the ban.
On the other hand, small businesses might need to reconsider their strategies for protecting proprietary information and maintaining a competitive edge. Without noncompetes, companies will likely turn to other measures such as nondisclosure agreements (NDAs), non-solicitation agreements, and robust onboarding and offboarding processes to safeguard their interests.
Benefits for contract workers
Contract workers and freelancers stand to gain significantly from the ban on noncompetes. These individuals often work on a project basis across multiple clients and industries, and noncompetes can severely limit their ability to secure new work and negotiate higher rates. The FTC estimates that banning noncompetes will lead to higher earnings for workers, with an average increase of $524 per year per worker.
Moreover, the ban is anticipated to lower health care costs by reducing the monopoly power that noncompetes grant employers, potentially saving $74 to $194 billion in physician services over the next decade. That level of savings could be particularly beneficial for independent contractors and business owners who typically bear the full cost of their health insurance.
Preparing for the change
Small businesses and contract workers should start preparing for this regulatory change now. Businesses should:
- Review current agreements: Identify any existing noncompete agreements and prepare to inform affected employees about their unenforceability.
- Adopt alternative protections: Implement NDAs and non-solicitation agreements to protect sensitive information and client relationships.
- Enhance company culture: Foster a positive work environment and strong employee relationships to encourage loyalty without relying on restrictive covenants.
Contract workers should:
- Explore opportunities: With the removal of noncompetes, look for new job opportunities that were previously off-limits.
- Review existing agreements: Identify any current agreements with now unenforceable noncompete clauses.