Earlier this year the Federal Trade Commission (FTC) issued a final rule that essentially banned noncompetes nationwide to protect the fundamental freedom of workers to change jobs, foster new business formation and increase innovation and competition.
This ruling is also expected to increase wages for workers and lower healthcare costs over the next decade. Along with this, the FTC says innovation will be increased, leading to an estimated average increase of 17,000 to 29,000 more patents each year. More importantly, the FTC estimates that business formation will increase by 2.7% per year as a result of the ruling.
In short, a noncompete agreement is a clause in a contract specifying that an employee must not enter into competition with another employer after the employment period is over. These agreements can also prohibit the employee from revealing proprietary information or secrets to any other parties during or after their employment. Most of these contracts specify a certain length of time when the employee is barred from working for a competitor or becoming a competitor after they end their employment. Those required to sign these agreements may include employees, consultants and contractors.
Under FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rules’ effective date, Sept. 4, 2024. Employers will be required to provide notice to workers, other than “senior executives” who are bound by an existing noncompete, that they will not be enforcing the agreements against them. (Anyone who earns more than $151,164 per year and is in a “policy-making decision” is classified as a senior executive.) Existing noncompetes with senior executives, who represent less than 0.75% of the workforce, can remain in force under the FTC’s final rule. Employers are banned from entering or attempting to enforce any new noncompetes, even if they involve senior executives.
Exceptions to the rule
Outside of senior executives, the noncompete ban does not apply to nonprofit organizations and industries not covered by the Federal Trade Commission Act, such as banks, savings-and-loan institutions, federal credit unions, common transportation carriers, air carriers and any individual or business subject to the Packers and Stockyard Act. Along with this, the rule does not apply to noncompetes that are part of a corporate acquisition or sale of business interests.
With noncompetes being rendered unenforceable, companies will look into alternatives to protect their business. Trade secret laws and non-disclosure agreements (NDAs) both can provide employers with well-established means to protect proprietary and other sensitive information. The FTC also recommends that instead of using noncompetes to lock in workers, employers that wish to retain employees can compete on the merits of the worker’s labor services by improving wages and working conditions.
Roman Basi is an attorney and CPA with the firm Basi, Basi & Associates at the Center for Financial, Legal & Tax Planning. He writes frequently on issues facing business owners. Ian Perry, staff accountant with the firm, co-authored the article. For more information, please visit taxplanning.com.
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