The Federal Trade Commission (FTC) recently announced that it would be banning non compete agreements. With the FTC non-compete ban, almost all forms of non-compete agreements are against the law. Because there is very little time left to get ready, you should start preparing your company’s strategy now.
7 Best Practices for Following the FTC’s New Non-Compete Rules
Fortunately, the FTC has already released some guidance about what is covered by the ban on non-compete agreements. By adopting the following best practices, you can ensure your organization navigates the new rules with ease.
1. Use Your Preparation Time Wisely
On September 4, 2024, the FTC non-compete ban will go into effect. While there have already been some challenges to the ban in court, it’s important not to count on these cases succeeding. The ban was just announced on April 23, 2024, so businesses were only given 134 days to prepare. As each day passes, this timeline shrinks.
You also can’t just make a plan and forget about it until September. There are specific notification requirements that you must fulfill before the ban begins, so you need to start working on your non-compete strategy now.
2. Research Exceptions to the Ban
Business owners shouldn’t assume who is or isn’t covered by this policy. The majority of employees are no longer eligible for non compete agreements. However, there are a few exceptions to the ban that you should keep in mind.
Franchises: Because the relationship between franchisee and franchisor is highly unique, the FTC has indicated that this relationship might not be subject to the non-compete rule.
Senior Executives: Senior executives are subject to the same rules as everyone else. The main difference occurs before the ban starts. If someone is called a senior executive, is involved in policy-making, and makes at least $151,164 annually, they qualify as a senior executive. Any non-competes that are already in place prior to the ban remain valid after the ban begins. You just can’t sign new ones.
Business Sale: Often, there are terms in the sale of a business that limit the former owner’s ability to compete or require the former owner to work at the business for a set amount of time. Because this is a unique situation, the FTC allows non-compete agreements for the business owner after the ban takes effect. Unlike in the past, someone can be considered an owner if they own any amount of the company.
Non-Profit Organizations: Non-profit groups aren’t technically bound by the FTC. While the FTC has indicated that they believe that non-profits must follow FTC rules if they’re engaged in profit-making activities, non-profit groups are generally not covered by this ruling.
It’s important to remember that this law doesn’t stop you from enforcing non compete agreements before or after the ban. If an employee violates your current non-compete agreement before the ban starts, you can legally pursue them before or after the ban is put into place. However, this situation only applies if the employee breaks your non-compete rules before the ban officially begins, not after.
4. Fulfill Your Notice Requirement
Under the FTC non-compete ban, you have a requirement to give your current and former employees notice that the non-compete rules no longer apply. This notice can be sent out via mail, text, email, or an in-person notification.
You can determine which employees to send the notification to by looking at the term length for your workers’ non-compete agreements. If the individual’s non-compete period has already passed, you don’t have to send them a letter.
In the Mission to Grow podcast called, “FTC Ruling On Non Competes,” Jackson Lewis P.C. principal Brian Shenker discussed ways companies can prepare for this change. According to Shenker, you should, “Ensure you have up-to-date contact information for your current employees. And look at what contact information you have available for your former employees. Get that ready because you’re going to have to send out notice.”
5. Avoid Overly Broad Language
Your non-compete agreements aren’t the only ways you can potentially violate the non-compete ban. Sometimes, non-solicit, non-recruit, and non-disclosure agreements (NDAs) have non-compete clauses as well. Before the ban goes into place, have your HR department and legal team carefully review these contracts for potential problems.
According to Shenker, one example is “wording in a non-disclosure agreement [ . . . ] that bars the employee from disclosing to any future employer any information that’s usable or relates to the industry in which they work. And so, something as broad as that could prevent that employee from going to work for a competitor, even though that’s the language found in a non-disclosure agreement.”
Non-solicit and non-recruit agreements may have similar policies that violate the ban on non-compete agreements. For example, an employer may ban former employees from recruiting workers or customers in an entire geographic region. This kind of description is so broad that it essentially functions as a non-compete agreement.
6. Rethink Your HR Strategy
As podcast host Mike Vannoy talks about frequently on Mission to Grow, the struggle for labor is going to continue for the foreseeable future because of demographics. From 2020 to 2022, the aging of Baby Boomers led to a rise in retirement rates. As this group continues to retire, it will pull a disproportionate amount of employees out of the workforce.
Rather than use non-compete agreements and similar measures to bind workers to your company, think of other ways to make your jobs more appealing. This may be through a 401(k) plan, a revamped company culture, or new employment benefits. As Vannoy said, “Train your employees so they can go anywhere they want, treat them well enough that they’ll never want to leave.”
7. Think About Making Compensation Contingent on Continued Employment
Because of the changes to non-compete agreements, there will likely be an increase in retention bonuses and similar payment arrangements. Instead of forbidding employees from working at similar places of employment, employers will provide added compensation contingent on their continued employment.
A retention bonus is typically worth 20 to 30% of the employee’s annual pay. In order to receive the full bonus, they must work a set amount of time. As a result, these bonuses can perform the same function as non compete agreements without breaking the FTC’s non-compete ban.
Find Out the Best Techniques for Handling FTC’s Non-Compete Regulations
Thanks to the FTC non-compete ban, many workplaces are rapidly changing the way they approach employment contacts. While non compete agreements are no longer allowed, there are alternatives you can use instead. From retention bonuses to better working conditions, you can encourage your current employers to stay longer without resorting to the manacles of non-compete agreements.
If you are trying to understand non-compete agreements and alternative options, we can help. Contact our small business HR and payroll experts today to learn more.