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What can businesses do now that noncompetes are banned?

On Behalf of | Jun 7, 2024 | Noncompete Agreements

Employers have long relied on contracts to protect them from liability and the risk of worker misconduct. A strong contract helps ensure a company can terminate and even penalize workers who engage in misconduct or have some standard job performance. Contracts can also help protect companies from inappropriate competition after a worker leaves their job.

For years, non-compete agreements have helped organizations prevent workers from poaching clients or trying to hire their former co-workers when they start their own businesses. Non-complete agreements typically restrict certain types of economic activity for a set amount of time after a worker leaves a job. Yet, a new federal rule now prohibits the enforcement of these agreements.

How did the law change?

Previously, employers in most jurisdictions could take former employees to court over their economic activity if it violated an employment contract. Businesses could file lawsuits against workers who started jobs with direct competitors or began their own businesses in the same industry. The courts could award employers compensation or order employees to cease infringing activities.

A new final rule established by the Federal Trade Commission (FTC) prevents employers from enforcing non-compete agreements. The FTC cited the chilling effect noncompetes have on entrepreneurship and career development, as well as the overuse of such agreements by businesses, as the main incentive for banning noncompete agreements in employment contracts. The agency estimates that the ban could lead to more than 7,500 new companies starting annually.

This rule applies not just to new contracts but to existing employment arrangements as well. Employers can no longer sue workers who go on to start their own businesses or take jobs at similar companies.

How can businesses protect themselves?

Companies hiring new staff members can rework their employment contracts to prevent inappropriate competition in other manners. Non-disclosure agreements, for example, could help protect trade secrets. Organizations may also need to renegotiate contracts with employees currently bound by non-compete agreements. Doing so can be a challenging process, as the job no longer serves as the valuable consideration the worker receives for making certain concessions.

Staying apprised of any significant changes to employment laws and federal policy can help organizations protect themselves from worker misconduct. Employers need to verify that their contracts are enforceable to ensure they offer adequate protection. Seeking legal guidance is a good way to get started.