Overview Of The FTC’s New Rule On Non-Compete Clauses

In a significant move that could reshape the American workplace, the Federal Trade Commission (FTC) has announced a new rule to ban non-compete clauses in employment contracts. This sweeping change is aimed at boosting innovation, increasing wages, and improving career mobility for millions of workers across various industries. The rule becomes effective September 4, 2024.

Background Of The FTC’s Decision

Non-compete agreements have traditionally been used by employers to prevent employees from joining competing firms or starting similar businesses within a certain period after leaving the company. While these agreements can protect legitimate business interests like protecting trade secrets, they have also been criticized for limiting job mobility, suppressing wages, and curbing economic innovation.

Responding to these concerns, the FTC’s rule represents a significant shift in federal policy, aiming to support a more dynamic and competitive labor market.

Key Components Of The FTC’s New Rule

The primary elements of the new rule on non-compete clauses include:

• Broad Prohibition: The rule would make it illegal for an employer to enter into or attempt to enforce a non-compete agreement with an employee. Additionally, it would require employers to rescind existing non-competes and actively inform employees that they are no longer in effect.
• Scope and Exceptions: While the rule primarily targets non-compete clauses, it does not apply to other forms of restrictive covenants like non-disclosure agreements (NDAs) and non-solicitation agreements, provided they are limited to protection of trade secrets and confidential information. It also does not apply to owners selling a business or to certain “senior executives” who already have non-competes in place.
• Application Across Industries: The rule is designed to apply universally across many industries and all salary levels, reflecting the FTC’s view that non-compete clauses can harm employees from both high-paying and low-wage sectors.

Intended Purpose Of The Rule

The FTC’s decision to move forward with banning non-compete agreements is driven by several intended purposes:

• Enhancing Career Mobility: By eliminating non-compete clauses, the FTC aims to empower employees to pursue new job opportunities without fear of legal retribution. This is expected to facilitate career development and allow workers to negotiate better terms of employment or start new ventures.
• Stimulating Wage Growth: Research cited by the FTC suggests that non-compete agreements contribute to wage stagnation. Without these restrictions, companies may need to offer better wages and benefits to attract and retain talent.
• Promoting Competition and Innovation: The rule is also expected to boost economic competition by allowing former employees to join or start competing businesses. This could lead to increased innovation as new companies bring fresh ideas to market.

Implications For Employers And Employees

For employers, particularly those in competitive industries, this change requires a reassessment of how they protect business assets without non-compete agreements. Businesses may need to rely more heavily on NDAs and non-solicitation agreements, and invest in employee development to retain talent.

Employees, on the other hand, may find they have more freedom to change jobs, negotiate salaries, and innovate within their industries. However, they must also navigate changes in how their employment contracts are structured and understand the new protections and their limits.

Legal Considerations And Next Steps

As the FTC’s rule becomes final on September 4, 2024, businesses and legal professionals should stay informed about the regulatory review process and be prepared to make adjustments to employment practices and contracts. Employers should review their current use of non-compete clauses and consider alternative strategies for protecting intellectual property and maintaining competitive advantage. However, there are legal efforts underway to challenge or delay this rule. The outcome of those suits remains unclear at this time.

Conclusion

The FTC’s ban on non-compete clauses marks a pivotal development in employment law, with far-reaching implications for workers and businesses alike. Bosshard Parke is committed to providing the latest legal guidance and support to navigate these changes effectively. Our team is ready to assist employers in adjusting their employment practices and help employees understand their new rights under this potential regulatory change. Request a consultation here.

Disclaimer: This article is for informational purposes only and should not be considered legal advice. For specific guidance on how the FTC’s new rule might affect you or your business, please consult with a qualified attorney at Bosshard Parke.