By Roy Maurer
While the U.S. Federal Trade Commission’s (FTC’s) new rule banning noncompete agreements faces legal challenges, workplace experts say employers should prepare for the rule by reviewing existing agreements, exploring alternatives and focusing on retention efforts, which have taken on added importance.
The FTC voted April 23 to prohibit most new noncompete agreements in employment contracts. The rule also makes all existing noncompete agreements except for those covering senior executives unenforceable and requires employers to provide notice to current and former workers that their noncompete clauses are no longer in effect.
The rule is supposed to go into effect in late August, but legal challenges will likely extend that timeline. The U.S. Chamber of Commerce has already sued to block the rule.
“It would not be surprising to see a federal court judge strike down the rule or put it on hold,” said Jonathan Crook, an attorney in the Charlotte, N.C., office of Fisher Phillips. “Appeals take time, so don’t be surprised if this battle drags on into 2025 and beyond. But while the rule is being challenged in court—which could derail it or kill it altogether—you may not want to wait to start preparing.”
Next Steps for Employers
Employers can respond to the new rule in several ways, said Kevin Roberts, an attorney in the Indianapolis office of Barnes and Thornburg. “They could wait and see what happens with the legal challenges, rewrite contracts to remove noncompetes, or sit on the fence by retaining noncompetes for high-level executives,” he said. “What employers choose to do will depend on several factors, including their workforce, business and industry.”
Roberts said that, at a minimum, employers should conduct an audit of their existing agreements, analyze the potential impact of the new rule on the agreements, and weigh the costs and benefits of not revising the agreements versus revising them.
“You will want to work with your legal counsel as soon as possible to craft an individualized strategy plan in light of these developments,” Crook said. “You’ll want to take into consideration the size of your business, the number of noncompetes in play, the importance of such agreements to your business, your risk tolerance levels, the resources you have on hand and a variety of other factors to determine your next steps.”
Crook recommended employers inventory all existing restrictive covenants, including those that bind former workers; determine which workers fall under the “senior executive” category; and make sure to track all new noncompetes going forward.
Karyn Rhodes, vice president of HR Services at HR technology company isolved, based in Charlotte, N.C., said that HR should conduct periodic check-ins with employees and review procedures for handling trade secrets and confidential information.
“Review which employees have access to trade secret information, whether they need to know that information and what information needs to be protected,” she said. “Review how confidential information is shared and secured, and have employees review confidentiality policies annually to ensure they understand what conduct to follow. Make sure nondisclosure agreements are in place, in which employees agree that they will not reveal trade secrets and remind employees leaving the organization about the importance of keeping trade secrets confidential.”
It may also be wise to prepare a list of impacted current and former employees in order to send notices, should the rule become effective.
Employers are required to provide “clear and conspicuous notice” to all workers whose agreements have been declared unenforceable by the final rule, said Melissa McDonagh, an attorney in the Boston office of Littler. “This notice must be in written form and delivered by hand, mail, email or text message. The final rule provides model language for this notice.”
Crook said that this would also be a good time to start thinking about alternatives to noncompete clauses. “Strategize with your leaders about whether your organization can protect your interests with a less burdensome covenant,” he said. “A properly tailored customer nonsolicitation or confidentiality provision could achieve the same goals with less risk involved.”
He added that the FTC rule does not clear these other restrictive covenants from scrutiny and that a review of these alternative agreements should also be conducted.
Protecting trade secrets is perhaps more important now than ever, Crook said. The FTC’s move may empower more workers with in-demand skills to move more freely between companies, creating a wider talent pool. This potential mobility means organizations must prioritize engagement to retain their top talent.
“It will be very important to have a retention strategy in light of the rule,” Rhodes said. “Work on improving key retention strategies such as flexibility, better work/life balance, competitive compensation and great benefits. When employees feel respected and appreciated at the company, they are less likely to leave and also less likely to share confidential information.”
HR will have to work harder at revising employee value propositions, boosting career development programs, fostering an inclusive work culture and creating a sense of belonging to build loyalty.
