FTC Non Compete Crackdown: What It Means for Employers and Employees Alike
Navigating the FTC non compete ban is essential for millions of employers and employees. This article cuts through the noise to explain the FTC’s ban on non-compete agreements, its motivation, and its broad implications for your employment contracts.
On April 23, 2024, the FTC voted to ban non-compete agreements. A non-compete agreement is between an employer and a worker. It prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.
Much of the business and media response to the FTC was predictably negative; most argued that the FTC Rule is overbroad and would harm business.
FTC Chair Lina Khan herself has been the target of much criticism. The Wall Street Journal editorial page has even published anti-Khan and anti-FTC writing once every 13 days since the beginning of Khan’s tenure.
Why the obsession with the Chair of a federal commission 50 times smaller than the Department of Commerce? Is the FTC’s ban on non-competes really going to cause labor costs to skyrocket?
And, more importantly, what does this mean for me if I signed a non-compete?
To answer, its first important to get some more background on what the FTC Rule is and what non-competes are.
Key Takeaways
- The FTC has enacted a ban on non-compete agreements to encourage competition and increase workers’ freedoms, which is expected to affect around 30 million employees currently subject to such contracts.
- Employers are directed to rescind existing non-compete clauses and may need to consider alternatives like NDAs and trade secret laws to protect their interests without restricting competition.
- While many states are introducing their own bans or limitations on non-compete agreements, the U.S. Chamber of Commerce plans to legally challenge the FTC’s authority to enforce such a ban.
FTC’s Ban on Non-Compete Agreements
In a bid to foster competition and bolster worker freedom, the FTC decided to enforce a nationwide ban on non-compete agreements. This decision aims to:
- Stimulate innovation and the formation of new businesses
- Address economic harm reports associated with non-compete agreements
- Address wage suppression concerns.
With the ban expected to take effect in 120 days, approximately 30 million workers currently bound by such training repayment agreement provisions may experience a dramatic shift in the dynamics of their employment.
Key Details of the Ban
Kicking in 120 days after its announcement on April 23, 2024, the ban noncompetes demands employers to rescind existing non-compete agreements and inform workers of their newfound freedom from such clauses. However, certain exemptions exist; non-compete clauses between business sellers and buyers or those involving specific senior executives can remain in force.
Criticism and Support
The FTC’s decision, made under the federal trade commission act, while hailed by labor groups and Democratic senators, has sparked fierce debate. The U.S. Chamber of Commerce, a representative of business interests, has vehemently opposed the ban, even going so far as to label it ‘blatantly unlawful’.
FTC Chair Lina Khan, in particular, has been in the eye of the storm, facing significant backlash from the business community. This contention underscores a deep-set divide in perspectives regarding the FTC’s approach to non-compete agreements.
Effects on Workers
The ftc’s proposed rule, which is now in its proposed final rule stage, is poised to translate into tangible financial benefits for workers, including potential ftc refunds to consumers. With the visualization of ftc refunds, estimates suggest an increase in their earnings by nearly $300 billion annually—an average boost of $524 per worker, per year.
The elimination of noncompete clauses is also set to usher in greater economic liberty for workers within labor markets, as noncompetes block workers from experiencing improved working conditions and enjoying heightened employment mobility. With the freedom to switch jobs, workers may benefit from these positive changes.
Moreover, the ban aims to bolster innovation. Projections indicate an annual increase of 17,000 to 29,000 additional patents and the inception of over 8,500 new businesses yearly. In response to this new competitive landscape, employers might find themselves improving wages and working conditions to effectively retain their employees.
Alternatives for Employers
With the non-compete agreements off the table, employers can explore viable alternatives. The FTC suggests trade secret laws and non-disclosure agreements (NDAs) as potential countermeasures. Interestingly, more than 95% of workers bound by non-compete agreements also have NDAs, indicating the current use of NDAs alongside non-compete clauses.
To safeguard trade secrets, employers can utilize the Uniform Trade Secrets Act and the Economic Espionage Act. These alternatives offer protection against unauthorized use or misappropriation of trade secrets, without relying on non-compete agreements.
State-Level Changes
Nationwide, states are increasingly enacting laws to limit or ban non-compete agreements, a trend that mirrors the FTC’s ban. Some examples include:
- California and Minnesota have passed laws to completely ban non-compete agreements, effective 2024 and 2023 respectively.
- New York’s legislature has also passed a bill with a broad ban that may require revisions.
- Other states like Connecticut, Indiana, Georgia, and Maryland have introduced stricter regulations or criteria for enforceability of non-compete agreements.
These collective state-level legislative actions signify a strong movement toward the elimination or significant reduction of non-compete clauses, directing employers to reassess their employment contracts.
Background on Non-competes
It is important to know that noncompetes are no longer rare. Some research shows that forty percent of workers have signed a noncompete at some point, including many who do not hold a college degree and are unlikely to have access to proprietary information.
The FTC says that “about one in five American workers—approximately 30 million people—are bound by a non-compete clause and are thus restricted from pursuing better employment opportunities”
Some arguments against noncompetes include research showing that noncompetes adversely affect employees’ ability to bargain for and seek employment matches that maximize their earnings. Because they impede mobility, they depress wages, both for workers who sign them and for those in the specific labor market.
Other research shows that they reduce new business formation and firm entry, leading to industry concentration and reduced growth. They also might reduce innovation by deterring would-be entrepreneurs from starting new companies and preventing the flow of knowledge between firms.
Other studies show noncompetes reduce employee motivation and incentives to invest in their own performance and human capital.
Lastly, some argue that noncompetes stagnate the labor market preventing the correction of gender and racial pay gaps.
Legal Challenges
The FTC’s ban on non-compete agreements, aimed at protecting competing business interests, hasn’t escaped legal scrutiny. The U.S. Chamber of Commerce is prepared to challenge the rule in court.
The primary contention revolves around the FTC’s legal authority to enact the non-compete rule, with the Chamber of Commerce suggesting overreach beyond Congressional authorizations. However, the FTC maintains its authority to define unfair methods of competition, which forms the basis for the new rule on non-compete clauses.
Preparing for the New Landscape
The new FTC final rule necessitates that employers take the following steps to comply with the latest regulations:
- Review their existing non-compete agreements.
- Inform their workforce, excluding senior executives, about the non-enforcement of current non-compete clauses.
- Ensure that the communication is aligned with the model language as guided by the FTC rule.
In this new landscape, employers are advised to consider less restrictive contractual alternatives to noncompete agreements, such as non-solicitation or non-disclosure agreements. Furthermore, both employers and employees are suggested to seek legal counsel to navigate this transition more effectively and ensure compliance.
What happens next?
The U.S. Chamber of Commerce indicated at the American Bar Association antitrust law section’s spring meeting that it would file suit to overturn the rule. A lawsuit would not just attack the FTC’s Rule banning noncompetes, it would also attack the FTC itself and its’ ability to create rules. It is impossible to predict what the Court system will do, so stay tuned.
Absent a Court order before then, the Rule goes into place in 120 days from April 23, 2024.
I Need to Fight an Arkansas Non-Compete Agreement; How Should I Proceed?
Most importantly, your employer will have their lawyers fighting for them, make sure you have an aggressive, professional legal council protecting your interests. It’s never wise to attempt to fight any non-compete agreement on your own.
Your local Bryant, Conway, or North Little Rock employment lawyer has a thorough and intimate understanding of the judges in your area, how they approach these cases and the status of all the new laws in Arkansas.
Your aggressive employment law team will use this local knowledge to your advantage when presenting and fighting your case. Consult your lawyer immediately, as your livelihood and family’s income may depend on it.
Summary
The FTC’s ban on non-compete agreements marks a significant shift in the relationship between employers and employees. With the potential to increase wages, improve employment mobility, and boost innovation, the ban promises to redefine the business landscape.
As we navigate this new terrain, it’s crucial to stay informed and adaptable. The ban is not the end—it’s a new beginning. It serves as a beacon of change, illuminating a path towards a more balanced and equitable work environment.
Frequently Asked Questions
What is the purpose of the FTC’s ban on non-compete agreements?
The purpose of the FTC’s ban on non-compete agreements is to prevent wage suppression, foster competition, and protect workers’ rights by allowing them the freedom to switch jobs without restrictions. This helps create a fair and competitive job market for workers.
When does the ban take effect?
The ban takes effect 120 days after its announcement, on April 23, 2024.
How will the ban impact workers?
The ban is expected to have a positive impact on workers, leading to increased wages, improved working conditions, and enhanced employment mobility.
What alternatives can employers consider in the absence of non-compete agreements?
Employers can consider alternatives like trade secret laws, NDAs, and improving working conditions to protect their interests. These options can provide similar protections without the potential downsides of non-compete agreements.
Are there any exemptions to the FTC’s ban on non-compete agreements?
Yes, there are exemptions for non-compete clauses between sellers and buyers of businesses, and for specific senior executives. These exemptions allow for non-compete agreements in certain situations.
