By Trüpp

On April 23, 2024, the Federal Trade Commission (FTC) issued its final rule banning noncompete agreements (with limited exceptions). The Final Rule goes into effect on September 4, 2024. The FTC expects this new rule to increase innovation and create new businesses.

The FTC estimates that the final rule banning noncompetes will lead to new business formation growing by 2.7% per year, resulting in more than 8,500 additional new businesses created each year. The final rule is expected to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and it is expected to lower health care costs by up to $194 billion over the next decade. In addition, the final rule is expected to help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years under the final rule.

According to NPR, the FTC received over 26 thousand public comments before the final vote, and it was estimated that about 30 million people were bound by noncompete agreements. Moving forward, employers will need to adapt their practices and policies accordingly. Here are important highlights from the New Rule:

Notice requirements

Employers must inform workers that their non-compete clause cannot be legally enforced against them by the effective date of September 4, 2024.

Exceptions

    • Non-compete clauses related to the sale of a business are exempt from the Final Rule requirements.
    • The new ban will not affect pending litigation resulting from non-compete clauses that existed before the effective date.
    • Employers may enforce non-compete clauses if they believe the Final Rule is not applicable. However, it is important to note that this exception will likely be difficult to justify.

State-specific requirements

Any state law, regulation, order, or statute that contradicts the Final Rule will be replaced by it. However, states are allowed to enforce laws or regulations that provide workers with greater protection than that of the Final Rule.

HR departments are now faced with a multitude of considerations regarding the ban on noncompete agreements. Employee retention is now a fundamental focus as HR teams collaborate with management to devise robust strategies. HR professionals must review and revise employment contracts to ensure they are adhere to the new regulations. Effective communication becomes imperative to relay policy changes to employees, fostering trust and transparency within the organization.

Here are some considerations and potential alternatives for employers to reinforce retention tactics while remaining compliant.

1. Review and Revise Contracts

Employers should review existing employment contracts and agreements to remove any clauses related to noncompete agreements. This might involve legal consultation to ensure compliance with the new regulations.

2. Develop New Retention Strategies

Employers may need to explore alternative methods for retaining talent without the option of using noncompete agreements. This could involve improving employee benefits, offering competitive salaries, providing opportunities for career development, and creating a positive work environment.

3. Confidentiality Agreements

Instead of noncompete agreements, employers may rely more heavily on confidentiality agreements to protect their proprietary information and trade secrets. These agreements prevent employees from disclosing sensitive information to competitors or using it for personal gain.

4. Non-Solicitation Agreements

Employers could implement non-solicitation agreements, which prohibit departing employees from soliciting clients, customers, or other employees to move with them to a new employer. This helps protect the employer’s relationships and business interests without restricting an employee’s ability to seek employment in their field.

5. Garden Leave Policies

Some companies may adopt garden leave policies, where departing employees are required to serve out a notice period during which they are paid but not permitted to work. This can help prevent employees from joining a competitor immediately while ensuring they receive compensation during the transition.

6. Enhanced Training and Development Programs

Investing in employee development can foster loyalty and reduce the likelihood of employees seeking opportunities elsewhere. Employers can increase employee engagement and longevity by providing training, mentorship, and opportunities for advancement.

Banning noncompete agreements provides an opportunity for employers to reassess employee retention strategies while ensuring compliance with regulatory changes. If you are feeling overwhelmed by these changes or have additional questions, our team is here to help!

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