Key Takeaways
- Noncompete agreements are legal contracts that bar employees from working for a competitor or starting a competing company for a certain period.
- The FTC's ban on noncompetes is set to take effect in September, but legal challenges could delay or derail the implementation.
- If you've signed a noncompete agreement with your company, review your contract and qualifications.
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The Federal Trade Commission's ban on noncompete agreements could increase mobility for workers nationwide, eliminating contractual barriers that bar employees from seeking new job opportunities or starting competing companies for a prescribed time period.
The rule, which the FTC approved on April 23, is sure to be challenged in court. Still, it pays to know how this potential ban could affect you.
What Are Noncompete Agreements?
Noncompete agreements, also known as restrictive covenants or noncompetition agreements, are clauses in employment contracts that restrict employees from engaging in certain competitive activities such as working for a competitor or starting a competing business for a specified period of time after leaving their current employer.
A noncompete clause is usually part of an employment contract but can sometimes be a standalone contract. Depending on the company, a worker may enter into a noncompete contract at the beginning, during or end of employment.
According to the U.S. Government Accountability Office’s 2022 nongeneralizable survey of private sector employers, 55% of nearly 450 responding employers reported having NCAs for at least some of their workers.
Employers use NCAs to protect their intellectual property, proprietary information and trade secrets. They may also use it to maintain their competitive advantage. You can typically find NCAs in industries like financial services, manufacturing, information technology and corporate management.
When Will the Ban on Noncompete Agreements Take Effect?
It's unclear if and when the ban will go into effect. The rule becomes effective 120 days after publication on Sept. 4, but Lauren Aydinliyim, assistant professor of strategic management at Baruch College and former lawyer specializing in employee noncompete agreements, said it’s likely the enforcement date will, at a minimum, be delayed.
"The noncompete ban has generated considerable controversy and legal challenges,” she wrote in an email. “Already, at least three lawsuits have been filed opposing the final rule. The outcome of these legal challenges could have a substantial impact on the ban's implementation and the FTC's ability to enforce it.”
Lauren Winans, chief executive officer and principal HR consultant for Next Level Benefits, agrees. “The likelihood of this rule becoming effective faces significant uncertainty due to expected legal challenges. Some experts even anticipate that the rule may ultimately fail in courts due to questions about the FTC's authority to impose such a sweeping regulation,” she said in an email.
What a Ban on Noncompetes Could Mean for You
A ban on noncompete agreements may give employees more freedom to pursue new jobs, start businesses or bring new ideas to market without the fear of legal repercussions. But there may be potential downsides, wrote Daniel Space, senior HR business partner director and HR content creator at DanFromHR, in an email.
“I think there will be a great deal placed on being far more cautious about hiring within the industry. For example, if you have eight years of experience working at three companies in the same industry, you’re considered really valuable now. But if the ban passes, a company may consider you as a higher-risk hire since your past experience might pose a threat in terms of competition or knowledge transfer,” Space said.
Winans said the ban on noncompetes could result in better workplace cultures and more attractive compensation packages. “Businesses will need to reevaluate how they attract and hire talent, focusing more on creating attractive working conditions and offering competitive salaries to retain employees, as they would no longer be able to rely on noncompete clauses to prevent employee turnover,” she explained.
What to Do If You Signed an NCA at Your Company
Take these steps to understand your rights if you’re bound by a noncompete agreement at your current company.
- Review contractual provisions. Review the terms of your noncompete agreement to understand its scope, duration and geographic limitations. “Besides reviewing your NCA, also take a look at severance agreements, forfeiture-for-competition provisions, nondisclosure agreements and training agreements, as these may operate similarly to noncompetes under the rule,” Aydinliyim said.
- Determine whether you qualify as a senior executive. While waiting for updates regarding the ban, Aydinliyim recommends checking to see if you qualify as a senior executive under the rule. “Existing noncompetes for senior executives (employees with income over $151,164 and have the final authority to make policy decisions) can remain in force under the FTC’s final rule. However, the FTC expects that only 1% of the workforce will meet this definition,” she said.
- Consult an employment attorney. If you want advice that’s tailored to your situation and the laws in your state, consider talking to an employment attorney who specializes in noncompete agreements.
Navigating the Uncertainties
As developments regarding the FTC ruling unfold, it’s important to stay informed. “Ultimately, the FTC ruling is very early, and only time will tell whether it sticks and how employers and employees alike should approach the change," said Gigio Ninan, CEO and co-founder of Shankar Ninan & Co., a law firm that provides legal services to small and medium-sized businesses. "There will be a ton of litigation surrounding this change, and state law will likely continue to also govern contract law and restrictive covenants generally.”
