What The FTC Ban On Non-Competes Means For Small Businesses

In January 2023, the Federal Trade Commission (FTC) proposed a groundbreaking rule to ban non-compete clauses in employment contracts. On April 23, 2024, the FTC passed the Non-Compete Clause Rule. Unless enjoined by the court, the Rule is set to become effective in 120 days.

What is a Non-Compete Clause?

Before we dive into the ban, let's clarify what non-compete clauses are. These are contractual agreements that typically prevent employees from working for a competitor or starting a competing business within a certain geographic radius and for a specified period after their employment ends. These clauses are designed to protect business interests, such as trade secrets and customer relationships. However, they have also been criticized for limiting workers' mobility and suppressing wages.

The FTC's Stance on Non-Competes

The FTC's proposed rule to ban non-compete clauses stems from concerns over their negative impact on workers and the economy. The FTC argues that non-competes stifle competition, hinder innovation, and keep wages artificially low. By banning these clauses, the FTC aims to promote a more dynamic and fair labor market where employees have the freedom to change jobs and start new businesses.

Legal Implications of the Ban

Employers will need to revise their contracts and remove non-compete clauses, not to mention reassess their approach to protecting intellectual property and trade secrets. For employees, it could lead to increased mobility and potentially higher wages (the FTC estimates as much as $300bn a year!) as a result of a more competitive job market.

It's important to note that the ban will likely face legal challenges, and the specifics of enforcement and compliance are still being worked out. However, it's crucial for small business owners to start preparing now as the expected date for the new rule to be in effect is September 4, 2024. Note that this is subject to future change.

Potential Impacts on Business

The FTC's proposed ban on non-competes could significantly impact how businesses operate. 

Protecting Business Interests

One of the main concerns for business owners is how to protect their interests without non-compete clauses. But, rest assured, while non-competes have been a common tool, they are not the only way to safeguard your business. Consider using non-disclosure agreements (NDAs) and non-solicitation agreements, which are more focused on protecting sensitive information and preventing poaching of clients or employees. Though, it should be noted that in the past few years, some states have also placed limits on non-disclosure/non-solicitation agreements.  

Recruitment and Retention

The ban on non-competes could have a positive impact on recruitment and retention. Without the constraints of non-compete clauses, employees may feel more confident joining your company, knowing they have the freedom to leave if necessary. This could enhance your reputation as an employer and attract top talent. However, retention strategies will need to focus more on creating a positive work environment and offering competitive benefits.

Innovation and Competition

The FTC believes that banning non-competes will spur innovation and competition. When employees are free to move between companies, they bring fresh ideas and perspectives. This increased flow of knowledge can lead to more innovation and a more competitive market. Small businesses that embrace this change and foster a culture of creativity and collaboration may find themselves at a competitive advantage.

Effect on Workers' Rights

One of the primary motivations behind the FTC's ban is the enhancement of worker rights. Here are three big ways that the ban could empower employees:

1. Job Mobility: The ban on non-competes is expected to significantly enhance job mobility. Employees will have the freedom to pursue new opportunities without the fear of legal repercussions. This can lead to a more dynamic labor market where skills and talents are better matched with job requirements.

2. Wage Growth: Increased job mobility is also likely to drive wage growth. When employees have the freedom to move to higher-paying jobs, employers may need to offer more competitive salaries to retain talent. This could be a win-win situation, benefiting both workers and businesses that can afford to pay for top talent.

3. Entrepreneurship: The ability to start new businesses without the constraints of non-compete clauses could lead to a surge in entrepreneurship. Employees with innovative ideas will have the freedom to turn those ideas into reality, contributing to economic growth and job creation. Small businesses may see more competition but also more opportunities for collaboration and partnership.

Challenges and Controversies

Despite its potential benefits, the FTC's proposed ban on non-competes is not without its challenges and controversies. 

1. Legal Pushback: The proposed ban on non-competes is likely to face legal challenges from various business groups and state governments. Some argue that non-compete clauses are essential for protecting legitimate business interests. The outcome of these legal battles will shape the future of the ban and its implementation.

2. Enforcement and Compliance: Enforcing the ban and ensuring compliance will be a significant challenge. The FTC will need to establish clear guidelines and work with state and federal agencies to monitor compliance. Small businesses will need to stay informed about these regulations and ensure their contracts and practices align with the new rules.

3. State vs. Federal Regulations: The ban on non-competes may also lead to conflicts between state and federal regulations. Some states already have restrictions on non-competes, while others have more lenient rules. Navigating these differences and ensuring compliance across state lines will be a critical issue for businesses operating in multiple states.

Preparing for the Ban

Businesses and employees should start preparing for the possibility of the ban on non-competes. 

For Employers

Clearly, the ban has major implications for business owners who need to be ready to meet these new requirements by September 4, 2024 (barring any changes that could be decided this summer):

• Review existing contracts and policies to identify any changes that need to be made.

• Focus on creating a positive work environment that encourages retention. Ensure your compensation is competitive and at market rates, offer development opportunities for employees to continue to grow at the firm, and promote a healthy work-life balance with flexible hours or remote work options.

• Stay informed about legal developments and seek legal counsel to ensure compliance.

For Employees

While this rule largely benefits employees, they nevertheless should be prepared for how this may affect them, if not now then in the future: 

• Understand your current contractual obligations and how they might change (or not as NDAs and non-solicitation agreements may still be valid).

• Stay informed about your rights under the new rule.

• Consider the implications for your career path and potential opportunities that could open up, whether through a more competitive job market or through entrepreneurship.

How Justworks Can Help

The FTC’s proposed ban on non-compete clauses is a significant change that will impact small businesses and employees alike–and we know it’s not easy to navigate changes like this. That’s where a Professional Employer Organizations (PEOs) like Justworks comes in. Justworks can be a valuable partner for small businesses through its comprehensive HR services, including  compliance support, contract management, and employee benefits administration. 

Not only can Justworks help you stay up-to-date with regulatory changes, but they can also ensure that your contracts are compliant. Get started today.