What is Still Allowed Under the New Rule 

Key Takeaways:
  • This move is intended to enhance career mobility and wage growth by making it easier for individuals to switch jobs and share their skills and talents across the market without restraint.
  • It’s important to inform both current and former—still bound by these agreements—that these clauses will no longer be enforceable.
  • While noncompete clauses face restrictions, other protective covenants are unaffected.

 

As a business owner, staying abreast of regulatory changes that can impact the operational and legal frameworks of your enterprise is important. A significant update from the Federal Trade Commission (FTC) is set to redefine the rules around noncompete agreements, with wide-ranging implications for both current and former employees under such contracts. Here’s what you need to know about the forthcoming changes, which are expected to take effect no earlier than Aug. 22, 2024. 

Why the FTC is Banning Noncompete Agreements 

The FTC has announced a new rule that will largely ban noncompete clauses in employment agreements. This move is intended to enhance career mobility and wage growth by making it easier for individuals to switch jobs and share their skills and talents across the market without restraint. However, it’s essential to understand the specifics of the rule to navigate it effectively. 

  • Notice Requirement: If you currently have noncompete agreements with your employees, it’s important to inform both current and former—still bound by these agreements—that these clauses will no longer be enforceable. This does not mean you must rescind all existing agreements or draft new ones. The current contracts remain valid but the noncompete provisions specifically will lose their enforceability, except for certain senior executives. 
  • Who Qualifies as a Senior Executive: The rule does create a carveout for existing noncompete agreements with senior executives — those earning over $151,164 who occupy policy-making positions, a demographic constituting less than 1% of the workforce — that are permitted to remain effective.  
  • What’s Still Allowed: It’s important to note that while noncompete clauses face restrictions, other protective covenants are unaffected. You can still include non-disclosure agreements (NDAs), non-solicitation clauses concerning customers and employees and confidentiality provisions in your employment contracts. These elements continue to be valuable tools for protecting your company’s proprietary information and maintaining competitive advantage. 

Broader Implications for Business Operations 

  • Communication with Community Boards: If you are involved with community boards or hold significant positions in local business groups, you’ll need to discuss the impacts of this FTC rule with the organizations you’re associated with. This ensures all relevant parties are aware of how the changes may affect their operations and governance. 
  • Implications for Business Transactions: For those considering selling a business or an ownership stake, noncompete agreements can still play a role. Such clauses are permissible in the context of business sales, where they can help protect the investment value of the company being acquired. 

Preparing for Change 

The FTC’s ruling is exclusively applicable to for-profit entities, meaning nonprofit organizations will not be impacted. Moreover, expect significant legal challenges to this rule, as courts are anticipated to become key battlegrounds in determining the practical applications of this change. 

As we approach the rule’s anticipated enforcement date, staying informed and consulting with legal experts to understand how these changes specifically affect your business will be critical. Changes of this scale can lead to confusion and operational challenges, but with proactive management and strategic planning, you can turn these regulatory adjustments into opportunities for your business to thrive in a newly competitive environment. 

For further details, the FTC provides resources and model language that can help you in complying with these new regulations. Learn more here.