When the Federal Trade Commission (FTC) issued a nationwide ban on employment noncompete clauses in April 2024, the immediate reaction among many employers was that of panic. For advocates of this ban, it’s a win in favor of free speech (which can include nearly one in five Americans—or about 30 million people—under one of these agreements), as some see a noncompete agreement as an infringement on free trade.
Beyond the reactions, the actual implications of this ban for employers and employees are even more important, and that’s what we’ll discuss today.
In part one of our series on noncompete agreements, we’re going to cover fundamental elements and varying viewpoints on noncompete clauses. Stay tuned for upcoming blogs that detail the reasoning behind this ban and what employers can do to protect their intellectual property without noncompete agreements.
The Basics: What is a Noncompete Agreement?
The FTC’s new rule marks a new era in employment law. It’s one that effectively prohibits employers from using noncompete agreements with their workers. Since the 15th century, noncompete clauses have been put in place to prevent a worker from engaging with a competitor for a certain period of time once that worker no longer works for the employer.
Ideally, employers base a noncompete agreement on legitimate business interests. This might include protecting their trade secrets or their customer relationships. Proponents of these agreements might also argue that workers under a noncompete agreement also tend to be paid more—about 25% more, according to recent statistics.
However, there have been many cases where these agreements were used unfairly or unethically to restrict workers from pursuing job opportunities and furthering their careers. Therein lies the controversy surrounding noncompete agreements.
Issues with Noncompete Agreements
Contention surrounding these agreements isn’t new either—many states already almost entirely prohibit them, including California and Oklahoma.
Other states, including Virginia, Washington, and the District of Columbia have extensive restrictions on these agreements. They have enacted laws to establish salary thresholds or banning noncompetes altogether for workers who aren’t considered a competitive threat. This can include employees who are 18 years old or younger as well as those paid on an hourly basis.
Critics note a number of issues with creating and enforcing noncompetes, often listing these four as the most pressing:
1.Restrict individual freedom and allow companies to control their workers
If an employee knows they won’t be able to work in a similar field upon leaving their current job, they often feel trapped despite low wages and other employment concerns. Another way to look at it is to consider how the agreements also restrict an employee’s ability to work freely in their chosen field. In turn, this limits their career growth and opportunities.
2. Harmful to economic growth
These agreements aren’t necessarily beneficial for economic growth, either—critics argue they prevent workers from contributing their skills and knowledge to other companies in related fields. These agreements also make it tough for small businesses to compete with bigger entities with more resources to enforce these clauses.
3. Potential for abuse and resulting legal issues
Without proper regulations, noncompete agreements can easily be abused by employers. Unfortunately, even if an employer doesn’t set out to abuse these clauses, there are many cases wherein they might not realize they are violating an employee’s rights until it is too late. This can result in costly legal battles for both employers and employees alike.
4. Associated costs
On the topic of expensive legal battles, it’s worth mentioning that enforcing these agreements tends to come at a great cost to employers. Not to mention, if they do end up wanting to enforce the agreement and take legal action, that will come with costs of its own.
Next, learn about other costly mistakes you can avoid with the right Denver legal services and a risk-management team in place in this blog.
Overview: What is The FTC Final Rule for Noncompete?
Before we discuss what these new regulations might mean once they’re in effect, there are fundamental details worth covering first.
What the FTC says
As the Federal Trade Commission explains, much of the reasoning behind a ban on noncompete clauses comes down to the advantages of free and open competition.
As they put it, the FTC’s final rule will:
- Create over 8,500 new businesses each year (a 2.7% new business annual growth rate)
- Increase worker wages (totaling $524 per year, per worker, on average)
- Decrease health care costs (by $194 billion over the next ten years)
- Promote innovation (an estimated 17,000 to 29,000 new patents each year for the next decade)
For a more detailed breakdown of the new rules, refer to the FTC’s Fact Sheet.
Did the FTC ban all noncompete agreements?
Under the new rule, existing noncompetes for most workers will no longer be enforceable, but there is a notable exception: senior executives. It’s worth noting, however, that senior executives (those in policy-making positions and/or making $151,164 each year) only account for less than 0.75% of workers.
Can my company enforce an existing noncompete?
While existing noncompetes for senior executives may still be enforceable, employers are prohibited from entering into or enforcing new noncompetes, whether for a senior executive or not, once the final rule takes effect later this year.
What is a good alternative to a noncompete agreement?
Here’s some good news: an NDA (nondisclosure agreement) can prove to be a promising alternative to a noncompete agreement. NDAs protect an employer’s confidential information. But unlike a noncompete agreement, they don’t restrict the employee’s ability to work in their chosen field.
Next, take a look at these essential elements of an NDA.
Next Steps: Contact Contiguglia Law in Denver
Contiguglia Law specializes in business law, employment law, and risk management–all areas that are impacted by a ban on noncompete agreements. Contact us today and our legal team will guide you through reviewing and updating your business policies to ensure compliance with the new FTC regulations and implementing effective alternatives.
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