ftc noncompete ban, shaking hands with new hire
ftc noncompete ban, shaking hands with new hire

How the FTC’s noncompete ban impacts small businesses and contract workers

Important Update – July 10, 2024: A Texas judge has temporarily halted the Federal Trade Commission’s (FTC) nationwide ban on noncompete agreements, which was set to take effect September 4 of this year. The FTC’s rule is currently on hold, but only for the parties challenging it in court. Employers not involved in the litigation must still comply with the rule. Judge Ada Brown will issue a final ruling by August 30, 2024. If no further rulings are made, the ban will still take effect on September 4.

The Federal Trade Commission (FTC) has recently finalized a rule that bans noncompete agreements, a significant shift in the employment landscape with far-reaching implications for small businesses and contract workers. The FTC’s stated intention for the new rule is to foster competition, innovation, and job mobility by removing the restrictive barriers that noncompetes typically impose.

Barring legal challenges, the noncompete rule is set to go into effect on September 4, 2024.

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.

By proactively adjusting to the new regulations, both employers and workers can thrive in a more dynamic and competitive marketplace.For more details on the FTC’s final rule, visit the FTC’s official announcement.

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