Non-compete agreements have long been used to bar employees from working for competitors or using sensitive information to kickstart competing organizations. A new ruling from the Federal Trade Commission has banned these agreements nationwide.
The ruling will go into effect in late August, preventing companies from enforcing existing agreements with the vast majority of workers. With immediate challenges issued by objectors to the FTC non-compete ban and additional nuance for those not yet affected by the ruling, CPAs face a confusing period within an already complex legal landscape.
What Prompted the FTC Non-Compete Ban?
According to the Commission’s Chair, Lina M. Khan, the new ruling was put into place as the current system:
- Curtails wages
- Prevents new ideas
- Halts progress
Following a 90-day comment period, the Commission revealed that 90% of the 26,000 replies it received on the proposed ruling were in favor of it going forward. As a result, the Commission has classified non-competes as an unfair method of competition, with the ruling going into effect 120 days after it was posted.
The FTC non-compete ban effectively removes states’ ability to individually decide how these agreements are handled. States such as California and Minnesota already had bans in place, but the FTC’s ruling now supersedes all state regulations.
Also read: Beneficial Ownership Information Reporting: How to Stay Compliant
What Will the Future Hold?
The FTC ban aims to promote progress by allowing employees to move more freely and begin their own businesses. With the ban, the Commission expects:
- 8,500 new businesses to be formed each year—a 2.7% increase
- Higher pay for employees
- $194 billion in reduced healthcare costs across the next ten years
- 17,000 to 29,000 more patents created across the next ten years
Are There Alternatives for Employers?
With the FTC non-compete ban, businesses may wonder how they can protect their trade secrets and prevent employees from discussing sensitive topics.
Currently, there are two pre-established methods of guarding proprietary information:
- Non-disclosure agreements (NDAs): These are legally binding contracts that prevent the person signing the NDA from discussing protected information with unauthorized parties. An estimated 95% of employees who have a non-compete also already have an NDA, implying a layer of protection is already in place before the ban goes into effect.
- Trade secret laws: These are intellectual property (IP) rights on information instead of physical products. They can apply to commercially valuable information, limited knowledge to a group of people, or otherwise subject to reasonable steps taken by the trade secret’s holders to keep the information private.
Are There Objectors?
The moment the ruling was posted, lawsuits began to trickle in objecting to the FTC non-compete ban.
The first came from Dallas-based tax services firm Ryan. Since then, additional lawsuits have been filed by the nation’s most prominent business lobbies, including the U.S. Chamber of Commerce and the Texas Association of Business, among many others.
The complaints find the new ruling unlawful and an overreach of bureaucratic power.
What Does the New Ruling Mean for CPAs?
For CPAs, the new FTC non-compete ban adds complexity to an already confusing legal landscape.
Not only are there legal challenges coming from business lobbies that may change the ruling’s outcome, but CPAs also need to stay abreast of the nuances surrounding who the ruling applies to.
Currently, there are two differences in how existing agreements are handled going forward:
- Majority of workers: From the rule’s effective start date, existing agreements for most workers will be unenforceable, and no new agreements can be implemented. Employers are required to give notice to employees that their current agreements are no longer in place.
- Senior executives: Current agreements with senior executives can stay in place even after the FTC non-compete ban goes into effect. Senior executives, workers earning more than $151,164, represent fewer than 1% of the workforce. No new agreements can be entered into, even with senior executives.
To streamline compliance, the Commission has removed an element of the ruling that would have required employers to legally change existing agreements, which would have introduced an additional formality to the process. Now, employers only have to provide notice, and the Commission has also included example wording for employers to use in their communications with employees.
Also read: Payroll Compliance: How to Protect Yourself
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