HR Question:

Our company uses a non-compete agreement with some of our employees, but I heard that the FTC will ban them. What does the non-compete ban mean for us?

HR Answer:

This is a question many employers are concerned about. On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule to ban non-compete agreements nationwide, that was set to go into effect 120 days after publication in the Federal Register.

However, as of August 2024, the FTC proposed non-compete ban has been put on a nationwide hold by a Texas court, and as a result, the rule will not take effect September 4th. The FTC will likely appeal the decision, but for now, existing non-competes remain valid. What should employers do if the FTC’s expected appeal is successful?

What is a non-compete agreement?

A non-compete agreement is a contract an employee signs, usually as a term of employment, that prohibits them from going to a competitor or starting a competing business when they leave the organization. This agreement usually is in effect for a set period – anywhere from one year and up to two years for the most stringent. The agreements often provide stipulations not allowing employees to work for a similar company, industry, and within a region, for that time after leaving the company. While non-compete agreements can be given to all employees, they are most often used for leadership, sales, and client management, and those in product innovation and research.

What is the reasoning for the ban?

According to the Federal Trade Commission (FTC), about one in five American workers – approximately 30 million people – are bound by a non-compete clause and are restricted from pursuing better employment opportunities. The FTC sees these agreements as violating anti-trust laws and harming workers, competition, and consumers.

Although regulations around non-compete agreements date back to the 1400’s, most of the United States still allow for non-compete agreements today. Currently, only three states have fully banned non-competes – California, Oklahoma, and North Dakota. New York almost joined the list until a recent bill was vetoed by the Governor.

Some states have guidelines and limitations on non-competes, such as the “garden leave” provisions in Massachusetts and Oregon, which require employers to pay departed employees during their non-compete periods. At least eight other states only allow non-competes for employees earning above a specific salary threshold.

Why do some companies use non-compete agreements?

While there are varied reasons a company may employ this practice, it’s often an attempt to stop employees from leaving, or stop employees who leave from taking information – and their competitive advantage – with them to another organization. Companies want to protect their research, innovation, product information, customer lists or clients, and other aspects of their strategic operations from falling into the hands of competition. Non-compete agreements can discourage this to some extent.

Most non-competition agreements are lumped together with other clauses for confidentiality or non-disclosure and non-solicitation rules.

What if the ban goes into effect?

1. Assess your need

Consider your true purpose and need for non-compete agreements your organization already has in place. Assuming your goal is to protect competitive and confidential information, you may want to consider switching the focus from non-competes to securing confidential knowledge. Following good HR practice, have your employees review confidentiality policies annually, not just at the time of hire. Promote professional norms of conduct around inappropriate information sharing outside of your organization through ongoing communications and training.

2. Analyze your talent retention approach

Evaluate your talent retention strategy so you’re not relying on non-competes to keep employees. Do you have strategies for retaining top talent, ensuring you won’t lose them regardless of a non-compete being lifted? Do you offer components we know are key for retention such as flexibility for better work-life balance, competitive and fair pay, growth and advancement opportunities, or other meaningful benefits?

3. Stay informed and explore your options

Non-compete agreements can be confusing for not only the employee, but also for potential recruiters and employers trying to hire someone bound by a non-compete from their last employer. If the agreements are not followed and a company decides to act, the worker (and the new employer) can end up in a frustrating, time-consuming, and potentially costly dispute. Alternatively, non-disclosure, confidentiality, and non-solicitation agreements can be effective in achieving the goal of protecting an employer’s business.

Read about the Federal Trade Commission Ban to understand your responsibilities in following and communicating this new rule with employees. Should the ban create the need to make changes to your employment agreements, be sure to consult with your legal counsel about the types of agreements that can effectively address your goals and concerns.

Thank you to Andrea Whalen, Senior HR Business Strategist, for contributing to this edition of our HR Question of the Week. 

Clark Schaefer Strategic HR knows that keeping abreast of HR compliance issues can be daunting, especially when the laws keep changing. We can help you stay compliant by offering resources to help you identify and mitigate compliance issues, such as our HR Audit to identify trouble spots in your HR function. Check out our HR Compliance & Recordkeeping page to learn more or contact us today!