Navigating the FTC's New Noncompete Ban: What Employers Need to Know

As technology has evolved and the value of intellectual property has surged, the use of noncompete agreements by employers has become increasingly common. These agreements are designed to prevent employees from taking valuable company information and key customers to competitors if they leave their positions. However, on April 23, the Federal Trade Commission (FTC) announced a significant shift: it will ban the use of most noncompete agreements when the new rule takes effect later this summer.

The Rationale Behind the Ban

The FTC argues that noncompete agreements have become so prevalent that they unfairly suppress wages, stifle innovation, and hinder workers’ ability to earn a living. The agency estimates that about 18% of U.S. workers are currently bound by such agreements, impacting approximately 30 million people. By eliminating noncompetes, the FTC forecasts several positive economic outcomes, including:

• An average annual wage increase of $524 for typical workers.
• The launch of over 8,500 new startups.
• The issuance of 17,000 to 29,000 additional patents over the next decade.

FTC Chair Lina M. Khan emphasized, “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

Key Details of the Final Rule

The FTC’s rule mandates that employers notify affected employees that existing noncompete agreements will no longer be enforced as of 120 days after the rule’s publication in the Federal Register. The expected effective date is September 4, 2024. Additionally, employers will be prohibited from entering into new noncompete agreements after this date.

A significant exception exists for noncompetes involving “senior executives,” defined as employees earning over $151,164 annually and holding policy-making positions. This category includes business presidents, chief executive officers, and other officers with policy-making authority. The earnings threshold includes base salary and nondiscretionary bonuses but excludes discretionary bonuses and fringe benefits. Employers may want to consult with legal advisors to determine if their senior executives meet this threshold.

Steps Employers Can Take

The FTC maintains that its ban does not leave employers defenseless. The agency’s press release highlights that trade secret laws and non-disclosure agreements (NDAs) are effective tools for protecting proprietary and sensitive information. However, it’s crucial to note that the final rule also restricts overly broad NDAs, nonsolicitation clauses, and training repayment agreements. Employers should work with legal counsel to craft precise NDAs that safeguard specific proprietary information without violating the new regulations.

The FTC’s goal is to encourage employers to compete on the merits by enhancing wages and working conditions, making employee retention strategies more critical than ever.

Navigating Legal and Compliance Challenges

The FTC’s ban has already faced legal challenges, with the U.S. Chamber of Commerce filing a lawsuit in the U.S. District Court for the Eastern District of Texas to block the rule, arguing that the FTC lacks the authority to implement such a sweeping change. Employers utilizing noncompetes are advised to consult with legal experts to develop compliant strategies. We are here to help you assess your employment practices and associated costs.