Navigating a Post-Noncompete World

The Federal Trade Commission's (FTC) decision to ban noncompete agreements has the human resources world buzzing. This decision has been on the radar since January 2023, when the FTC first raised the possibility of examining this topic. During the 90-day public comment period, they received more than 26,000 comments, 25,000 of which supported the new rule. When 96% of Americans agree on something in 2024, you're probably onto something.

The rule goes into effect 120 days after it is added to the federal register, which looks like late August or early September 2024. Let's take a closer look at what's changing and how it's going to impact recruiting and retention efforts in the future.

Key Details You Need to Know

1. The new rule prevents businesses from entering into any new noncompete agreements after the effective date. This applies to both regular employees and "senior executives."
2. Existing noncompetes will become invalidated on the effective date except for "senior executives," whose existing noncompete agreements may still be enforced. Senior executives are defined as employees whose compensation is more than $151,164 annually and who are in policy-making positions.
3. Employers must inform employees (besides senior executives) who had an existing noncompete that it is no longer enforceable. The FTC provided sample language for this notification here.
4. The final rule applies to all organizations under the FTC’s jurisdiction, which may include some nonprofits. Tax-exempt organizations are advised to consult counsel before disregarding the rule. The FTC uses a two-part test to determine whether a corporation is organized for profit, focusing on the nexus between an organization's activities and its public purposes and the proper allocation of net proceeds to public interests. In other words, the FTC does consider some tax exempt organizations to fall under their purview.

Why the Change?

Noncompetes have long been a target of worker advocates. The argument is that employees are pressured to sign the agreements since many firms require them, and the practice can be exploitative. Detractors say that noncompetes artificially suppress wages and reduce innovation by making would-be entrepreneurs afraid to start businesses in the industries they know best.

Clearly, the Federal Trade Commission agrees with these arguments. Their analysis released with the final ruling claims that the rule will boost average worker earnings by $524 per year and will boost new business formation by 2.7% per year. That is 8,500 new businesses each year.

The counter argument from business advocates is that noncompetes encourage businesses to invest in training their employees by ensuring that a former employee will refrain from using those skills against them in the near future. I'm also seeing a lot of commentary about how noncompetes are critical when buying a business to ensure that the seller doesn't just start a new company to compete with the buyer. The FTC rule already includes a carve-out that explicitly allows noncompetes for this purpose, so you can safely ignore any fear-mongering posts that trot out this argument. Sadly, I've already seen several on social media from lawyers, but you know… who has time to read a legal document before making a video about it?

There's no judgment here toward employers that utilize noncompete agreements. Most everyone does, to the point that it has become a reflex for many organizations. It's your classic slippery slope. The concept was initially conceived to prevent high-powered executives from unfair competition but is now commonly used on entry-level workers. For example, even Subway and Jimmy John's had their Sandwich Artists on noncompetes until the courts stepped in! While there are many totally ethical companies out there that use noncompetes for valid reasons, it's also clear that others have pushed the practice well past any reasonable limit to the point that something had to be done.

The Immediate Response and What Lies Ahead

Based on the prevailing headlines, the initial reaction from business groups has been adverse. The US Chamber of Commerce has sued to block the FTC's noncompete ban. It's still being determined if this will cause any delay in the rule's implementation. The Chamber of Commerce has yet to request an injunction temporarily blocking the rule from taking effect; however, they are expected to do so.

Although legal experts do expect the implementation of the rule to be delayed in court, we feel that employers should consider how to proceed very carefully for the following reasons:

1. Waiting for the outcome will require following the court case closely to avoid missing any potential updates (which could result in punitive action if that update is that the rule goes into effect and you haven’t complied).
2. Five States have already banned noncompete agreements, and another dozen have passed legislation significantly limiting their scope. Human Resources teams have enough compliance issues managing payroll and benefits in different states and countries without adding soon-to-be-extinct contracts to the mix. Plus, the longer this gets held up in court, the more likely it is that more states will jump in on the ban at a state level.
3. A non-disclosure agreement (NDA) accomplishes much of the same outcomes with significantly less headache and stigma. This is a cornerstone of the FTC's argument. If your NDA prevents former employees from sharing trade secrets, customer lists and so on, they already shouldn't be able to compete with you unfairly.
4. Finally, the stigma of noncompetes is now off the charts. The practice was already under severe scrutiny, but having been banned by a government agency, employers that continue to insist on the practice while things play out in courts will be making an extremely bad first impression on their new hires.

Assessing the Business Impact

There is a frustrating division within old-school organizations where leaders view their company as multiple "us vs. them" scenarios. You have the whole company versus your competitors and the company's ownership versus all other stakeholders. If you look at the new rule as "us vs. our employees," the rule is bad for the company. Our take is that this is an outdated and ineffective school of thought.

What is good for the goose is good for the gander and for the goose farmer. That is why at Remotivated, we view the new FTC rule as a net positive for businesses.

The case in favor of noncompetes made by the US Chamber of Commerce and other business advocates can be summarized as "But the free market!" but that argument is intellectually dishonest.

Artificial barriers that hinder the flow of workers, ideas, and innovations always hurt the free market. Government regulations are not generally seen as promoting free market principles, but that is precisely what is happening here.

Noncompete contracts are inherently based on government interference in business. We are talking about a document that says, "You can't do X, Y, or Z, and if you do, I'll tell on you, and the courts (government) will make you stop." So yes, the FTC rule is a government rule, but it's actually removing an existing bureaucratic intervention rather than adding a new one.

Moving Forward

At Remotivated, we believe removing artificial barriers like this will positively affect employers in the long run. Well… perhaps not all employers will be better for it, just the ones that matter. That might sound harsh, but we believe that the best companies prioritize all of their stakeholders and that these companies tend to win in the end. Our mission is to accelerate that process however we can.

As more barriers are removed, the best companies are increasingly going to have the best employees. Remote companies have already overcome the geographical barriers to acquiring the best talent, and now there is one less legal barrier as well.

Remotivated exists to independently verify and promote businesses with amazing cultures, so no, we aren't exactly losing sleep over the idea of a world where talent can freely flow to the best employers. The migration of the best talent from mediocre businesses to superior ones is something that Remotivated celebrates and actively works to bring about.

The only challenge left for those companies is providing compelling social proof that the daily reality of their culture backs up the claims you see on their careers page, which is what Remotivated is here to help with. Our Top Remote Culture certification shows prospective employees that your organization walks the walk. The analytics we provide around talent density, engagement, and mental health in the workplace provide compelling data points for your recruitment and retention efforts. Head over to our Certification Page to get more information and ensure that your business is a beneficiary rather than a victim of the noncompete migration.

As you may have noticed, we have some feelings on this matter. We will be following it closely, so subscribe to our newsletter below to stay up to date with the new noncompete rule and other remote work tips.