On April 23, 2024, the Federal Trade Commission (FTC) announced the rule banning noncompetes. This will take effect nationwide. A noncompete is a contract that specifies that employees cannot leave their current organization to enter a similar profession that could be in competition. This legal agreement was an attempt to keep past employees from revealing information or secrets to the competition, usually for a specific timeframe after employment ended. These agreements could restrict employees from working with competitors, within geographic locations, or specific markets and industries. The negative effect it had on the workforce was that once a professional left the organization, it would prevent them from getting a job in the field that they were in. This often meant that those people were forced to take lower-paying roles or to take jobs outside of their expertise.
What is to be expected
The banning of noncompetes according to the Federal Trade Commission is an effort to protect the freedom of workers to change jobs, increase innovation, and encourage new business formation. The FTC expects that this will lead to a growth in business formation by 2.7% per year, increase earnings by $524 per year for the average worker, lower health care costs, and increase innovation with an expected 17,000 to 29,000 more patents per year. Employers will no longer be able to enforce noncompete agreements after the rule’s effective date. However, existing noncompetes for senior executives will remain. No new noncompetes will be enforceable including with senior executives. Employers will be required to give notice to employees that their current noncompetes will no longer be enforced.
How will this affect hiring?
Companies will have to switch from the mindset of locking in their employees to locking in their secrets. Workers will have the freedom to move from one company in the industry to another with no legal repercussions. This means the war on talent could get even more competitive. Companies will need to focus on how to increase loyalty in their employees. Organizations can get creative in encouraging loyalty through what they can offer employees. This likely will look like higher compensation packages and fostering better workplace environments. To be competitive in a tight talent pool, companies can leverage options such as offering growth opportunities, continued education, flexibility, etc.
Other alternatives
While this is not in effect just yet, companies can start to think of alternative plans to protect their secrets. Other options could be non-disclosure agreements (NDAs) and trade secret laws to protect sensitive information. However, companies have time to decide on their approach to this as the final rule will not be effective until 120 days after the publication in the Final Register.
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