On Tuesday, April 23rd, 2024, The Federal Trade Commission announced they were issuing a final rule banning noncompetes nationwide. The ruling comes over a year after the FTC initially announced they were considering the ban.
Reasons Behind the Ruling
According to FTC chair, Lina M. Khan, “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned.”
Essentially, the FTC determined that these sorts of clauses are generally exploitative and tend to only provide a benefit to employers while putting undo restrictions and burdens on employees. The FTC cited examples such as employees being required to relocate to a new area or take a position in a lower paying field as evidence of the types of issues employees subject to a noncompete face.
These agreements currently affect around 18% of the U.S workforce, and the FTC anticipates that removing these restrictions could lead to a 2.7% growth in new business formations, as well as estimated earnings increases of around $524 per year for workers. Additionally, they anticipate that there will be lower health care costs as a result.
What Does this Mean for Businesses?
Under this ruling, all existing noncompetes become “essentially unenforceable,” with companies being banned from entering new noncompetes. The exception to this rule is that existing noncompete agreements with senior executives can remain in effect.
Additionally, it’s important to note that the wording of this ruling only applies to agreements between workers and employers. This means that noncompete agreements between a buyer and seller of a business entity are exempt from this ruling as well.
One important thing to note is that businesses concerned about keeping information from competitors can still use trade secret laws and non-disclosure agreements to keep this information from competitors.
Given that many employees who are subject to a noncompete clause are typically also subject to an NDA there should be comparatively little impact on business operations or trade secrets despite the ruling.
The final thing to note is that the ruling will go into effect 120 days after publication in the federal registrar.
What You may Need to do
As mentioned above, the FTC is attempting to ensure that this ruling is easy to comply with. According to their announcement, employers merely have to notify their employees that they will no longer be enforcing noncompetes against them. If you are a business owner that needs to do this, their announcement provides model language that you can use.
There are no other required steps as far as the ruling goes, but you may want to ensure that any employees that are privy to sensitive proprietary information have an NDA in place, and that you remain up to date with all trade secret laws that may apply to ensure that your company’s assets are protected.
If you need assistance with any aspect of this ruling Seck & Associates can help with our 15+ years of helping entrepreneurs navigate changes such as these.* Have questions? Please do not hesitate to reach out today.
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* Correction: The original post was missing the link attribution to the original announcement.