One of the biggest challenges in HR is being prepared for a change in legislation while also keeping things in place in the event they stay status quo. So how can you prepare for an elimination of these contracts? By diving into the purpose and nature behind non-competes.
What Happened?
In January of 2024, The Federal Trade Commission (FTC) voted 3-2 that non-competes were an “unfair method of competition”. The goal is to ensure Americans have limited restrictions in entering the labor market. Final rule was published in May 2024.
When Will This Rule Take Effect?
September 4, 2024.
Who is Exempt from this Rule?
- 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.
Employers have typically 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.
Considering that the political landscape will continue to flip flop, it’s best to be prepared for both scenarios. Here are some ways to look deeper into strengthening your current contracts.
5 Steps to Prepare for a Federal Non-Compete Ban:
1. Identify where non-compete clauses exist in your current contracts.
Tip: The FTC rule also prohibits 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 notify if the rule goes into effect. FTC Compliance Guide for Businesses with Notice Template.
3. Boost your bonus structure, ensure your salaries are competitive, and review your referral program to continue to attract and retain 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.
- 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.
The information provided does not, and is not intended to, constitute legal advice. All information and materials are for general informational purposes only. Contact your attorney to obtain advice with respect to any legal matter.
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.
