At HumCap, we understand the pivotal role that people play in the success of your organization. As experts in human capital management, we keep a close eye on regulatory changes that impact the workforce. Recently, the Federal Trade Commission (FTC) finalized a groundbreaking rule that bans noncompete agreements for most workers. This ruling marks a significant shift in employment practices and presents new challenges and opportunities for businesses.
The FTC’s Final Rule Explained
On April 23, 2024, the FTC voted to finalize a rule that prohibits employers from entering into noncompete clauses with workers after the effective date. The rule states:
“The final rule provides that it is an unfair method of competition—and therefore a violation of section 5—for persons to, among other things, enter into non-compete clauses (“non-competes”) with workers on or after the final rule’s effective date. With respect to existing non-competes—i.e., non-competes entered into before the effective date—the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing non-competes can remain in force, while existing non-competes with other workers are not enforceable after the effective date.”
For a deeper dive into learning about this ruling, anticipated impacts, and solutions to mitigate risk, click here to watch HumCap’s webinar.
Key Highlights of the Ruling
- Effective Date: The rule takes effect on September 4, 2024.
- Scope: The rule applies to all “workers”, not just “employees.” This applies to anyone that’s doing work for a company. The rule states that existing noncompete clauses are not enforceable with workers (other than senior executives) and simplifies the notice and compliance requirements for employers.
- Exemptions: The ruling does not apply to nonprofits, certain industries not under FTC jurisdiction, and specific legal relationships such as bona fide sales of businesses and franchisor/franchisee relationships.
- Senior Executives: Noncompete agreements for senior executives (those earning over $151,164 annually or in policy-making positions) can remain in force.
- Supersedes State Law: This federal rule overrides any state laws regarding noncompete agreements.
Anticipated Impacts on Businesses
The FTC estimates that the ban on noncompete agreements will result in:
- Reduced Healthcare Costs: $74-$194 billion in savings on physician services over the next decade.
- New Business Formation: A 2.7% increase in the rate of new firm formations, resulting in over 8,500 additional businesses annually.
- Rise in Innovation: An average increase of 17,000-29,000 patents per year, representing an 11-19% annual growth.
- Higher Worker Earnings: $400-$488 billion in increased wages for workers over the next decade, with the average worker’s earnings rising by an estimated $524 per year.
Navigating the New Landscape
While this ruling aims to foster competition and innovation, businesses will need to adapt to the changing environment:
- Review and Revise Agreements: Examine current restrictive covenants in your agreements to ensure compliance.
- Embrace Competition: Be prepared to respond to new competitors entering the industry.
- Focus on Agility: Maintain an agile approach to stay ahead in innovation.
- Reallocate Budgets: Analyze and adjust budgets to align with the new competitive landscape.
Noncompete Alternatives
To protect proprietary and sensitive information, businesses can turn to well-established alternatives:
- Trade Secret Laws and NDAs: Over 95% of workers with a noncompete already have an NDA in place. Ensure robust trade secret protection practices, including strict access controls, employee training, and monitoring systems.
- Confidentiality Training: Regularly train employees on the importance of confidentiality and the protection of proprietary information.
HumCap Is Here to Help
HumCap is ready to assist you at any stage of your HR needs. With over 22 years as an established leader in HR solutions, our expertise in HR consulting, system integration, talent management, and recruitment services makes us the ideal partner to navigate these regulatory changes. Let’s work together to ensure your business thrives in this new environment.
Book a consultation with HumCap today to discuss how we can tailor our services to support your organization’s growth and compliance needs. Together, we can turn these challenges into opportunities for success.
