Non-compete agreements are legally binding contracts, often signed during the onboarding process. They restrict what an employee can do after they leave a job, including who they can work for and what industry they can work in. Traditionally, these agreements have been used to stop employees from leaving a company and then working for a competitor, starting a business that competes with their last employer, or soliciting customers they used to work with.
Some lawmakers are seeking to change that. In the spring of 2024, the Federal Trade Commission (FTC) issued a rule intended to ban most non-compete agreements. Under the proposed legislation, employers would be banned from entering into new non-compete contracts, and most current agreements would become unenforceable.
For much of the year, employers believed the non-compete ban would take effect on September 4, 2024. Then, in August, a Texas District Court struck down the new legislation. The ban did not take effect in September and is currently unenforceable. However, experts predict that the FTC will appeal the Texas court’s decision.
At the moment, non-compete agreements remain legal and enforceable. That could change in the near future. To protect your company from any possible compliance issues, HR should make a plan for what to do if non-compete agreements are eventually banned.
The FTC Non-Compete Rule
The FTC decided to issue a ban on non-compete agreements for several reasons. FTC Chair Lina M. Khan announced that the ban “will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market” instead of being handcuffed to a job that’s a bad fit.
The proposed rule has some caveats for senior executives – meaning those who earn more than $151,164 per year and have influence over company policy. But for all other workers, here’s what HR needs to know:
- Employers would NOT be allowed to enter into new non-compete agreements.
- Employers would NOT be allowed to enforce existing non-compete agreements.
- Employers would be required to give notice to workers with existing non-compete agreements, informing them that these clauses would not be enforced.
For senior executives:
- Employers WOULD be allowed to enforce existing non-competes.
- Employers would NOT be allowed enter into new non-compete agreements with senior executives.
Timeline of Non-Compete Ban Legislation
- April 23, 2024 – FTC issues a final rule banning most non-compete clauses, slated to take effect on September 4, 2024 (Kennedys Law).
- April 23, 2024 – Ryan LLC, a tax services provider, files a lawsuit challenging the FTC’s authority to ban non-competes (Ryan).
- May 8, 2024 – U.S. Chamber of Commerce intervenes in Ryan LLC vs. FTC, joining Ryan LLC as a plaintiff in the case (U.S. Chamber of Commerce).
- August 20, 2024 – the United States District Court for the Northern District of Texas rules in favor of Ryan LLC, preventing the FTC from implementing the non-compete ban (Kennedys Law).
Alternatives to Non-Compete Agreements
While non-compete agreements are enforceable for now, that could change if the FTC escalates the issue to a higher court. Employers can expect there to be many changes to this divisive issue in the coming months. Fortunately, even if non-competes are ultimately struck down, there are other ways to protect your business entity.
Non-disclosure agreements (NDAs), for example, restrict the employee from disclosing confidential information such as trade secrets, customer lists, marketing plans, and other sensitive data. You could also have new hires sign a customer non-solicitation agreement. These contracts restrict former employees from soliciting clients they worked with at your company for a certain period of time.
If you’re concerned about past employees starting their own businesses, you could also consider an employee non-solicitation agreement. These agreements prevent former employees from soliciting colleagues at your company for a set period after they leave.
How to Stay Compliant with Changing Regulations
As of September 2024, employers do not need to make any major changes. But if the FTC’s ban does take effect, HR will have to act quickly. To prepare for that possibility, make sure to meet with a lawyer and review what the potential ban would mean for your company.
You can also use this opportunity to update your employee handbook and onboarding processes. As long as the ban is tied up in court, expect some workers – including your team and potential hires – to have outdated information about the issue. Make sure your recruiters and hiring managers are prepared to answer any questions and revamp your processes if needed.
HR can also function as a strategic partner to the C-suite in this process. For example, your legal team might decide all new hires need to sign NDAs before they start work, just in case non-competes become defunct. In that case, it would be HR’s job to design and implement a new workflow.
How Paycor Helps
Paycor’s HCM software streamlines communication, empowering HR to share important updates with the whole team. Compensation planning helps you design a competitive strategy so you can attract and retain high performers, even if wages spike across industries. Compliance tools help you prepare for changing laws, avoid hefty fines, and stay competitive in today’s labor market.
