Skip to main content

How Will Nationwide Ban of Noncompete Agreements Affect SMBs?

By May 21, 2024May 28th, 2024HR, Legal

In April 2024, the Federal Trade Commission (FTC) issued a final rule announcing a nationwide ban on noncompete agreements. Noncompete agreements are typically signed at the beginning of a business relationship, such as when a new employee is hired.

The FTC asserts that noncompetes are an “often exploitative practice” that prevents workers from having the freedom to change jobs or start a business. If a worker subject to a noncompete wants to leave a job, he or she may be forced to work in a different, lower paying field, relocate, leave the workforce altogether or defend against expensive litigation, according to the FTC.

Effects of Noncompete Ban on SMBs

Owners of small- to medium-sized businesses (SMBs), have legitimate business needs that noncompetes have historically protected. Employees with extensive proprietary business knowledge who have developed relationships with clients pose a risk to the employer if they jump ship and go to a competitor.

For this reason, eliminating noncompete agreements may create a substantial burden for employers and make them more vulnerable to business risks.

Alternatives to Noncompetes

The FTC believes that employers have reliable, well established options for protecting their investments without having to enforce a noncompete. These options include:

  • Trade secret laws. The misappropriation of trade secrets is subject to civil and criminal penalties, as well as legal action by employers.
  • Nondisclosure agreements (NDAs). NDAs create contractual obligations for an employee to keep sensitive business information confidential.
  • Making improvements to wages and working conditions that will incentivize employees to stay.

In addition, the ruling does not restrict nonsolicitation agreements, which an employer can require an employee to sign alongside an NDA. A “nonsolicit” can protect an employer’s customer list when an employee leaves for a competitor, or it can prevent the employee from trying to woo other employees to leave the company with them.

Notifying Formerly Restricted Employees

Under the final rule, employers can continue to enforce existing noncompetes for senior executives (those in policy-making positions who make more than $151,164 annually). Employers simply can’t create or enforce new noncompetes with senior executives.

The FTC eliminated a previous requirement that employers would need to legally modify existing noncompetes by formally rescinding them. Instead, employers now simply must provide notice to workers that a former noncompete agreement will not be enforced against them.

This website uses cookies to ensure you get the best experience on our website.