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Am I completely barred from using noncompetes now?

On Behalf of | May 15, 2024 | Business Law

One of the many tools that small businesses owners use to protect their business is noncompete clauses and contracts to protect their business secrets. However, in a pivotal decision, the Federal Trade Commission has voted to prohibit for-profit United States employers from enforcing noncompete clauses in employment contracts. This potentially affects millions of workers currently bound by such agreements, including those that work or worked for small businesses.

What is the rule?

The final rule is a slightly narrowed version of the proposed one from January of last year. It bans new noncompete agreements and renders existing ones unenforceable after 120 days from this FTC rule publication in the Federal Register. However, exceptions exist for senior executives earning over $151,164 annually and in policy-making roles.

This rule passed by a 3-to-2 vote. However, it was not passed without controversy. The dissenting commissioners deeming the rule “unlawful” and predicting its demise in legal challenges, including a planned lawsuit from the United States Chamber of Commerce.

Why was it passed?

The FTC views noncompetes as exploitative and coercive as they limit job mobility, suppress wages, stifle innovation and imped fair competition. The FTC believes that confidentiality clauses and trade secret laws are the better way to protect business interests.

What about state laws?

This nationwide ban supersedes state laws. And, the FTC estimated that this new rule will increase almost $500 billion in wages and benefits over a decade. Nonetheless, legal challenges may delay enforcement, potentially preventing implementation.

Conclusion

Given the complexity of court determinations on fairness and as this new rule has not yet been challenged, employers should stay informed about employment law changes and their impact. However, the writing is on the wall, and employers do not want to be caught on the wrong side of the law. If they currently use noncompetes. Now is the time to switch to other contractual clauses to protect businesses interests.

 

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