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The FTC is Banning Non-compete Agreements: What Does it Mean for Small Businesses?

Employee non-compete agreement
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The Federal Trade Commission (FTC) has issued a final rule that bans non-compete clauses nationwide for all workers, including senior executives. FTC Chair Lina M. Khan describes the move as a stride towards bolstering competition and freeing workers to pursue new career opportunities and participate in healthy business competition.

“Non-compete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned,” Khan said in a statement. “The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

Existing non-competes with workers other than senior executives are not enforceable after the effective date, which is 120 days after Federal Register publication. However, senior executives, which are defined as workers earning more than $151,164 who are in “policy-making positions.” The FTC estimates that these executives account for less than 0.75% of U.S. workers. (Click here to read the rule in its entirety.)

Implications for Small Business Owners and People Managers

Non-competes have been a standard for many organizations, especially in media and tech. However, non-competes can have rippling effects for workers in all industries, preventing them from tapping their expertise and bringing new, innovative ideas for market. The FTC outlined how the new rule will impact all businesses, however, the data points to significant value for small businesses and startups in particular:

  • Boost in Innovation: The FTC estimates that an additional 17,000 to 29,000 patents will be filed annually under the new rule. Small businesses and startups will get to benefit from  a richer ecosystem of ideas and inventions.
  • Increase in Startups: The FTC projects a 2.7% increase in new business formation, which is equivalent to more than 8,500 new companies annually. Entrepreneurs previously restrained by non-compete agreements can now venture into new businesses without legal hindrances, creating a more dynamic business landscape.
  • Economic Growth: Without non-competes, workers are expected to earn an additional $524 yearly. This increase in disposable income could boost consumer spending, indirectly benefiting businesses across sectors.
  • Competitive Hiring: Small businesses need top talent (which significant experience) in order to grow and thrive. However, they often lose out to large corporations with strict non-compete agreements. The new rule levels the playing field, allowing smaller firms to attract and retain skilled workers by focusing on competitive wages, better working conditions, and opportunities for growth, according to the FTC

Reactions and Preparations

The FTC initially proposed the Non-Compete Clause Rule on Jan 19, 2023. Since then, the commission has conducted extensive research on how non-competes impact competition and collected more than 26,000 public comments. The response from the public was astounding, garnering more than 25,000 comments in support of the proposed ban.

With non-competes off the table, the FTC recommends that companies lean into alternative legal protections such as trade secret laws and non-disclosure agreements (NDAs), practices already employed by 95+% of workers with previously enforced non-competes.

For small business owners, founders, and leaders, the removal of non-compete agreements is poised to create new avenues for growth, innovation, and competition. It encourages a business landscape where success is determined by the ability to attract, develop, and retain talent through merit and differentiated benefits rather than restrictive legal agreements.

The FTC is Banning Non-compete Agreements: What Does it Mean for Small Businesses?

by | Apr 30, 2024

Employee non-compete agreement

The Federal Trade Commission (FTC) has issued a final rule that bans non-compete clauses nationwide for all workers, including senior executives. FTC Chair Lina M. Khan describes the move as a stride towards bolstering competition and freeing workers to pursue new career opportunities and participate in healthy business competition.

“Non-compete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned,” Khan said in a statement. “The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

Existing non-competes with workers other than senior executives are not enforceable after the effective date, which is 120 days after Federal Register publication. However, senior executives, which are defined as workers earning more than $151,164 who are in “policy-making positions.” The FTC estimates that these executives account for less than 0.75% of U.S. workers. (Click here to read the rule in its entirety.)

Implications for Small Business Owners and People Managers

Non-competes have been a standard for many organizations, especially in media and tech. However, non-competes can have rippling effects for workers in all industries, preventing them from tapping their expertise and bringing new, innovative ideas for market. The FTC outlined how the new rule will impact all businesses, however, the data points to significant value for small businesses and startups in particular:

  • Boost in Innovation: The FTC estimates that an additional 17,000 to 29,000 patents will be filed annually under the new rule. Small businesses and startups will get to benefit from  a richer ecosystem of ideas and inventions.
  • Increase in Startups: The FTC projects a 2.7% increase in new business formation, which is equivalent to more than 8,500 new companies annually. Entrepreneurs previously restrained by non-compete agreements can now venture into new businesses without legal hindrances, creating a more dynamic business landscape.
  • Economic Growth: Without non-competes, workers are expected to earn an additional $524 yearly. This increase in disposable income could boost consumer spending, indirectly benefiting businesses across sectors.
  • Competitive Hiring: Small businesses need top talent (which significant experience) in order to grow and thrive. However, they often lose out to large corporations with strict non-compete agreements. The new rule levels the playing field, allowing smaller firms to attract and retain skilled workers by focusing on competitive wages, better working conditions, and opportunities for growth, according to the FTC

Reactions and Preparations

The FTC initially proposed the Non-Compete Clause Rule on Jan 19, 2023. Since then, the commission has conducted extensive research on how non-competes impact competition and collected more than 26,000 public comments. The response from the public was astounding, garnering more than 25,000 comments in support of the proposed ban.

With non-competes off the table, the FTC recommends that companies lean into alternative legal protections such as trade secret laws and non-disclosure agreements (NDAs), practices already employed by 95+% of workers with previously enforced non-competes.

For small business owners, founders, and leaders, the removal of non-compete agreements is poised to create new avenues for growth, innovation, and competition. It encourages a business landscape where success is determined by the ability to attract, develop, and retain talent through merit and differentiated benefits rather than restrictive legal agreements.