The Federal Trade Commission (FTC) ushered in the new year with a proposal to prohibit noncompete agreements nationwide. If implemented, this rule would prohibit companies from issuing new noncompete agreements and require them to revoke any existing agreements. This potential ban could have significant implications for your company, and you may need to consider alternatives for protecting business interests and retaining employees.
Noncompetes and the Law Today
A noncompete agreement is a contract between an employer and an employee in which the employee agrees not to compete with the employer during or after the employment relationship. Employers claim these agreements protect business interests, such as trade secrets, confidential information, and customers. Employees argue they exploit workers and impose systemic inequity, and some states agree.
Several states, such as Colorado, Virginia, and Washington state, limit noncompete agreements only to workers above a salary threshold, while others, like California, North Dakota, Oklahoma, and Washington, D.C., ban noncompete agreements with very few exceptions. The states, and now the federal government, argue that noncompetes hinder healthy competition and limit talent pools.
The FTC Proposal
The FTC proposes to prohibit noncompete agreements virtually altogether as a violation of Section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices in or affecting commerce. Companies would be barred from issuing new agreements and forced to rescind agreements in place. The proposal comes following an announcement that the FTC filed complaints against multiple companies and individuals based on noncompete restrictions the Commission views as unfair methods of competition. The Commision will receive public comments for 60 days, review them, and then issue a final rule to become law.
The Federal Trade Commission (FTC) states that approximately 20% of American workers are subject to noncompete agreements, which restrict their wages and job opportunities, as well as bind them to their current employer. Additionally, the FTC argues that these clauses hinder innovation by inhibiting entrepreneurship and obstructing economic liberty.
What This Means for Employers
At this point, the rule is simply proposed, but employers should move forward to implement alternatives for achieving business purposes. While some specifics may adjust from the proposal, it, along with state laws, provide guidance. By establishing alternatives now, you control the timing, scope, and initial messaging.
To protect trade secrets and confidential information, you should use a nondisclosure agreements (NDA) as part of a strong intellectual property (IP) policy. The NDA protects confidentiality and ensures that commercially valuable information is handled appropriately. This standard NDA provides a basic framework for the provisions that this agreement should include, such as confidentiality, compliance with security policies, and long-term protection of the employer’s intellectual property assets.
If noncompete agreements serve as a method to retain employees, then you’ll need to develop employee experience efforts. Employee experience is about the fundamental way an organization chooses to value and treat its employees, contractors, temporary workers, suppliers, and its entire ecosystem of talent. An ideal employee experience is built upon how your employees are empowered, engaged, encouraged, and energized each day to do their best for the company and themselves. These efforts will provide greater positive impact on the company than noncompete agreements ever have. We’ll share more about the employee experience in our Market Guide coming later this year.