FTC Noncompete Ban: Compliance, Ethical Challenges, and Alternative Strategies

In April, the U.S. Federal Trade Commission (FTC) announced a significant ban on noncompete agreements, which will impact the ethics and compliance functions within companies. This rule, set to take effect by September, voids approximately 99% of existing noncompetes, which prevent employees from joining competitors or starting rival businesses. A temporary exception exists for senior executives earning over $151,165 annually in policy-making roles, allowing existing agreements to run their course but prohibiting new ones.

According to an article from Navex, the ban is favorable for workers, potentially increasing wages by $400 billion over the next decade and facilitating the creation of 8,500 new businesses annually. However, employers are concerned about losing trained employees to competitors and the complications of varying state laws regarding noncompetes. Compliance officers are tasked with navigating this new landscape, requiring identification of eligible senior executives and ensuring adherence to the FTC’s guidelines, which align with the SEC’s definition of executive officers.

Companies must also consider state-specific noncompete regulations, performing detailed analyses similar to those used for data privacy laws, and crafting hiring policies that comply with local laws. Ensuring compliance will require careful coordination with HR to avoid enforceability issues and litigation risks.

Ethically, noncompetes are unpopular among employees, highlighting power imbalances. Companies should explore alternative protections like non-solicitation, non-disclosure, or trade secrets clauses, which must not mimic the restrictive nature of noncompetes to comply with the FTC Noncompete ban.

These alternatives can protect commercial interests without alienating employees, fostering a better corporate culture. Despite ongoing policy management and training challenges, aligning protection strategies with employee satisfaction is a worthwhile path amidst the evolving employment law landscape.