Banned! Your Non-Compete Agreements Are Probably Worthless – What To Do Now

Yesterday, the Federal Trade Commission (FTC) issued a Final Rule banning virtually all non-competition agreements between employers and employees, which might shake up your approach to onboarding, retention, IP, and security.

So what does that mean? Employers may enforce pre-existing non-competes with "senior executives" but cannot enter into them in the future. As to employees who are not "senior executives," the Final Rule will void all existing non-competition agreements and require employers to notify employees that the existing non-competition agreements cannot be enforced. This ruling means you'll need to find alternative ways to protect your business interests.

Unsurprisingly, the proposed change to this rule prompted more than 26,000 comments from members of the public. During yesterday's vote, the FTC stated that more than 25,000 of these comments favored the ban. The examples are pretty terrible and credible. The Commission report estimates that more than 1 in 5 American workers are under a non-compete agreement.

The FTC's Final Rule concludes that all non-compete agreements – regardless of whether the employee is a senior executive – violate Section 5 of the FTC Act because they are "restrictive and exclusionary." The FTC also found that non-competes with employees other than senior executives violated Section 5 because they were "exploitative and coercive." As to senior executives, the FTC found that senior executives are the individuals most likely to start new businesses and create jobs – therefore, according to the FTC, even non-competes with senior executives harm the public.

The Final Rule leaves existing non-competition provisions with senior executives in place because these existing non-competes are more likely to have been the subject of negotiation, and undoing them would unduly burden the employer. The Final Rule defines "senior executives" as those who earn more than $151,164 annually and are in "policy-making positions." This term is loosely defined but likely includes only your Exec team.

The FTC's rationale behind this decision is that all non-compete agreements, regardless of the employee's position, are deemed restrictive and exclusionary. Additionally, non-competes with employees other than senior executives are considered exploitative and coercive. The FTC believes that even non-competes with senior executives harm the public by stifling innovation and job creation.

What do you need to do? Review your records.

  • Pre-existing non-competes will be void, and employers must provide "clear and conspicuous notice" to affected employees within 120 days of the Final Rule being published in the Federal Register that the worker's existing non-compete will not be, and legally cannot be, enforced.
  • Review your Handbook and policies for any language that may lead employees to believe that non-compete agreements bind them.

So, what does this mean for you as a small business owner with IP and sales strategies to protect? It's time to explore alternative methods of safeguarding your business interests without relying solely on non-compete agreements.

Instead of non-competes, consider implementing:

  1. Stay Interviews: Talk to your critical employees, develop relationships with them, understand what they value and what makes them love their job and working for you, and foster that. Listen to their frustrations and try to address them.
  2. Get Data: Review your turnover data and exit interviews. Why are employees leaving? Is it comp? An uninspiring supervisor? Get curious.
  3. Confidentiality Agreements: These agreements, also known as non-disclosure agreements (NDAs), protect your sensitive business information from being shared or used by competitors.
  4. Non-solicitation Agreements: Restrict former employees from soliciting current clients or employees after leaving your company.
  5. Intellectual Property Assignment Agreements: Ensure that all IP your employees create during their employment belongs to your business, reducing the risk of disputes over ownership.
  6. Trade Secret Protection Measures: Implement robust security protocols to safeguard your trade secrets and confidential information from unauthorized access or disclosure. Tighten off-boarding and personal device usage.
  7. Employee Training Programs: Educate your employees on the importance of protecting your business's IP and sales strategies, emphasizing their role in maintaining confidentiality and preventing competitive harm.

As a firm specializing in labor relations and employment matters, we understand your challenges in adapting to the ever-changing landscape of employment practices. We're here to help you navigate these complexities and develop tailored strategies to protect your business interests effectively.

Contact us today to schedule a consultation and learn how we can help you ensure compliance with the latest "Final Rule."

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