On April 23, 2024, the U.S. Federal Trade Commission (“FTC”) issued a new rule banning employers form enforcing clauses that restrict workers from switching employers within their industry. The new rule makes it illegal for employers to include the agreements in employment contracts and requires companies with active non-compete agreements to inform workers that they are void.
Although the new rule applies to anyone other than senior executives (workers earning more than $151,164.00 annually and who are in policy-making positions), it also bans employers from imposing new non-compete contracts on senior executives in the future.
The FTC’s rational for the new rule is that it fights unfair competition, promotes healthy competition, protects the fundamental freedom of workers to change jobs, increases innovation, and fosters new business formation.
Under the FTC’s new rule, existing non-compete agreements for the vast majority of workers will not longer be enforceable after the rule’s effective date of 12o days after the Federal Register publication, not after the FTC’s public announcement of April 23, 2024. Therefore, the new rule will not go into effect until the Fall of 2024.
Alternatives to Non-Compete Agreements
Employers have several alternatives to non-compete agreements that still enable companies to protect their investments without having to enforce a non-compete agreement. Here are a few alternatives:
- Trade Secret Agreements – These agreements provide companies with the option to protect its intellectual property (“IP”), including systems, processes, customer lists, vendor lists, etc…, which make up the company’s business. By prohibiting workers from using your company’s IP, companies can protect some of its interests.
- Non-Disclosure and Confidentiality Agreements – These agreements provide companies with a mechanism to identify and define confidential information, and prohibit the disclosure of the same to anyone else, including a competitor. By specifying the confidential information, companies can protect themselves from workers with ill intent.
- Loyalty and Non-Solicitation Agreements – These agreements prohibit workers from soliciting, recruiting, enticing or encouraging a company’s workers, customers, and vendors and other key partners from leaving the company to work with them at their new employer or new venture. By restricting a worker’s ability to poach these key partners, companies can provide themselves with some protection from workers with bad intentions.
- Use More Contracted Workers – By contracting with another company as a vendor to provide labor, companies can transfer the responsibilities to the vendor, and restrict the vendor and the vendor’s workers from competing with the company. Since the contracting parties are the company and the vendor, the company can look to the vendor to recover damages if any of the vendor’s workers assigned to the company causes damages to the company by learning its operations, then going to work for the company’s competitor, giving them an unfair advantage.
- Build a Stronger Company – Instead of using non-compete agreements to lock in workers, companies that wish to retain good employees can compete on the merits for the worker’s labor by improving their value propositions for their workers (increased wages, better working conditions, attractive benefits, fulfillment, etc…)
