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.
But recent laws are changing all that. In the spring of 2024, the Federal Trade Commission (FTC) issued a final rule that bans most non-compete agreements. Starting on September 4, 2024, most employees can no longer be bound by these contracts – even pre-existing ones.
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 new 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 may NOT enter into new non-compete agreements.
- Employers may NOT enforce existing non-compete agreements.
- Employers must give notice to workers with existing non-compete agreements, informing them that these clauses will not be enforced.
For senior executives:
- Existing non-competes CAN be enforced.
- Employers may NOT enter into new non-compete agreements with senior executives.
Alternatives to Non-Compete Agreements
At first glance, it may seem like the ban on non-compete agreements leaves your company vulnerable. Fortunately, 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.
Expected Impact of the FTC Non-Compete Rule
The FTC estimates new legislation will promote business growth, raise wages, and drive innovation. Specifically, they predict:
- 17,000-29,000 more patents per year, on average
- 2.7% increase in the formation of new business entities
- Typical workers will earn $500+ more each year
These changes could have a major impact on the labor market. If more workers leave their current roles to start new businesses, HR could see an increase in turnover. To keep up with rising wages, you might need to update your compensation strategy. Business leaders can prepare for this shift by investing in the tools they need to boost employee engagement, retention, and long-term loyalty.
How to Stay Compliant with the new FTC Non-Compete Rule
If your company has existing non-compete agreements, the new FTC ruling will probably make them unenforceable. However, because the law has certain limited exceptions, it’s best to consult with a lawyer and review what it means for your company. When the ban takes effect, companies will need to inform all employees of the change.
You can also use this opportunity to update your employee handbook and onboarding processes. Make sure recruiters and hiring managers know new hires cannot enter into non-compete clauses. Once your workflows are up to date, share any relevant changes with your entire team.
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. 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.
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