One of the biggest challenges in HR is preparing for a change in legislation while keeping things in place if things stay status quo. So how can you prepare for a non-compete ban? By diving into the purpose and nature behind non-compete contracts and taking steps to protect your trade secrets.
What Happened?
In January 2024, The Federal Trade Commission (FTC) voted 3-2 that non-compete contracts were an “unfair method of competition”. Their goal is to ensure Americans have limited restrictions in entering the labor market. The final rule was published on May 7, 2024.
When Will This Rule Take Effect?
September 4, 2024, pending legal challenges.
Who Does This Rule Not Apply to?
- Senior executives with existing non-compete agreements.
- According to FTC’s website, “senior executives” refer to workers earning more than $151,164 who are in a “policy-making position.”
- Employees on “garden leave” but still on the payroll.
- Nonprofits and bona fide sale of a business.
What to Watch:
This rule is being challenged by private entities in Texas and Pennsylvania, stating the FTC doesn’t have the authority to make rules on employment contracts. U.S. Chamber of Commerce has also expressed they will join the fight.
Update: Texas and Pennsylvania courts will decide if an injunction will take effect in July, 2024.
Traditionally, employers have used non-competes to discourage employees from taking the knowledge they have gained to work for the competitor. Non-competes also work in tandem with non-disclosures to protect trade secrets and confidential information.
5 Steps to Prepare for a Federal Non-Compete Ban:
1. Consider identifying non-compete clauses in your current contracts. The FTC rule also prohibits the use of agreements deemed to be “functional non-compete” agreements.
- Review existing non-compete contracts, confidentiality, and non-solicit agreements to ensure they comply with your state law. Review your state’s laws.
- Review other forms of protection, including “garden leave”, severance periods, pay and term periods for specific periods of work.
- Review NDAs, non-solicitation agreements, and training repayment agreements.
2. Make a list of employees, excluding senior executives, to send a notice to if the rule goes into effect.
3. Boost your bonus structure, ensure your salaries are competitive, and review your referral program to continue to attract and keep top talent.
4. Batten down the hatches on trade secrets.
- Strengthen your protection on trade secrets by limiting access to proprietary information.
5. Audit protection of your trade secrets.
- Audit and enhance your IT and data use policies.
- Perform security audits on software where you hold proprietary information.
- Enhance your onboarding and off-boarding procedures, ensuring data restriction and wiping procedures are in place with real-time termination.
- Ensure you have a quick response plan in place in the event your trade secrets have become compromised. Take yourself through a case-by-case scenario. If your proprietary information was shared, what would you do?
It’s always beneficial to work proactively. Ask for help from leaders of your team and consider delegating some of these tasks. For example, you could give a checklist to IT to ensure compliance with protecting trade secrets or use ChatGPT prompts for HR to come up with a first draft of notices, policies, and more.
HRIS systems have built-in compliance tools to facilitate your onboarding and off-boarding policies. We have excellent recommendations for the best HRIS or applicant tracking systems to help you stay ahead in your approach.