The Federal Trade Commission (FTC) has made a monumental decision by endorsing a final regulation that prohibits noncompete agreements in most employment relationships. Although pending filing in the Federal Register, the final rule is anticipated to impact an estimated 30 million workers nationwide. Employers should brace for change by addressing its potential implications as soon as possible.

The Rationale Behind the FTC's Decision

The FTC offers several compelling advantages to the change, such as:

• A boost to innovation, resulting in 29,000 additional patents annually
• A 2.7% increase in new business formations (8,500 new companies per year)
• A $500 billion wage increase for workers over the next decade ($524 per worker per year).
• An estimated $200 billion reduction in medical services in the next 10 years

Explaining the FTC Rule Banning Noncompetes

The final rule defines a noncompete clause as an employment provision that restricts, penalizes or prevents a worker from:

• Pursuing or accepting employment with another individual with work scheduled to begin post-employment, under specific terms or conditions; or
• Operating a business in the U.S. post-employment with specified terms or conditions like employee contracts or workplace policies, written or verbal.

Subject to limited exceptions, the final rule mandates:

• Prohibition of noncompete clauses as of the effective date
• Nullification of existing noncompete clauses
• Employers must notify impacted employees that existing noncompete agreements are unenforceable

Noncompete clause enforceability varies by state and local legislatures. States such as California, Minnesota, Oklahoma and North Dakota have prohibited noncompete agreements while others have imposed restrictions on their usage. The proposed FTC rule would govern at the federal level, superseding state laws or judicial interpretations.

Senior Executive & Industry Exemptions

Certain exceptions apply to the recent ruling, including provisions for senior executives and certain industries. A senior executive, comprising less than 1% of the workforce, is identified as earning over $151,164 and holding a policy-making position. Additionally, industries such as nonprofits and insurance, outside the FTC’s jurisdiction, are also exempt from the proposed ruling.

Legal Challenges

Legal challenges have already emerged, with the U.S. Chamber of Commerce filing a lawsuit on April 24, 2024, seeking to block the final rule. The complaint was filed in the U.S. District Court for the Eastern District of Texas, arguing the FTC lacks the authority to establish regulations that define unfair methods of competition. Employers should monitor updates and anticipate potential uncertainty as additional legal obstacles are expected.

Discover new regulations that can impact your business and lead to costly claims and fines in Navigating 2024’s Compliance Risks for Businesses. 

Potential Implications for Employers

The impending regulation will impact businesses and the economy, particularly as 18% of the workforce is bound to noncompete agreements. This figure is notably higher in certain industries like technology. Banning noncompete agreements would allow employees to explore opportunities with competitors or start competitive ventures. The FTC aims to enhance competition among employers, enabling organizations to recruit employees previously restricted by noncompete agreements. This could also alter compensation negotiations as employers will likely rely on alternatively protective clauses to protect their business interests.

Strategies for Employers to Adapt to the FTC Rule

Businesses should proactively review existing employee agreements (e.g., new hire paperwork) for noncompete clauses. Consider alternative measures to noncompete clauses, such as:

Nondisclosure Agreements (NDA)

Outlines confidential information and prevents employees from disclosing it without authorization. NDAs protect sensitive business information, trade secrets, intellectual property, client lists, proprietary technology, financial data and other restricted information.

Nonsolicitation Agreement (NSA)

Restricts employees from soliciting clients, customers, employees or additional business relationships to benefit a competitor or third party. Companies use these features to protect their business interest and prevent departing employees from stealing valuable resources or relationships.

Employee Training

Educate workers to understand the significance of protecting intellectual property and client relationships. Offer training on laws related to intellectual property, confidentiality obligations and ethical practices to raise awareness and foster a culture of compliance.

Partner with Legal Counsel

Collaborate with your attorney to establish strong policies and procedures for governing intellectual property and confidential information. Utilize their legal expertise to develop comprehensive employment contracts with provisions related to IP ownership, confidentiality, nondisclosure and nonsolicitation. Clearly define employee obligations and the consequences of any violations. Communicate and enforce these guidelines to ensure organizationwide compliance.

Monitor & Enforce

Utilize technology and procedures to identify and prevent unauthorized access and misuse of intellectual property and client data. Quickly investigate any suspected breaches and take necessary measures to protect the company’s interests.

Ensure Sufficient Insurance Coverage

Despite clear protocols and procedures, challenges can still arise. Employment practices liability insurance offers protection against claims stemming from FTC noncompliance. Additionally, commercial crime insurance protects your business from financial losses due to fraudulent employee activities.

We’re Here to Help Prevent Employment Claims & Fines

Employers must adjust to the FTC's ban on noncompete agreements by seeking alternative solutions and obtaining suitable insurance coverage to reduce risks. A well-rounded risk management strategy is essential for businesses to handle these challenges. Connect with a member of our team for more information on the FTC rule or a thorough assessment of your coverage.