On April 23, 2024, the Federal Trade Commission (FTC) banned virtually all non-compete agreements across the US.
What are Non-Compete Clauses?
Non-compete clauses are contractual agreements that restrict employees from working for a competitor or starting a similar business for a certain period of time after leaving their current job. These clauses have been widely criticized for limiting worker mobility and suppressing wages.
Who is Affected?
The FTC's rule applies to most workers and companies should note that non-compete clauses in employment agreements will no longer be permitted. There is a narrow exception for existing non-competes with senior executives earning more than $151,164 annually and holding policy-making positions. But employers are prohibited from entering into new non-competes with even the senior executives.
Implications to Startups
Challenges
Increased Employee Mobility: Startups often invest heavily in training employees on specific technologies or processes. With the ban on non-competes, there's a risk that employees may leave for competitors after this training, potentially taking valuable knowledge with them.
Attracting and Retaining Talent: Startups often compete with more established companies for talent. Without the ability to enforce non-compete clauses, it may be harder for startups to convince top performers to stay, especially if they can't offer the same level of compensation and benefits as more established companies.
Protecting Trade Secrets: Startups may be concerned about protecting their intellectual property (IP) if employees can easily leave and work for a competitor. This could discourage them from investing in research and development.
Opportunities
You can hire the best people, regardless of past employers. No more worrying about talented individuals being locked into non-compete clauses with previous companies.
Focus on Building Loyalty: Since non-compete clauses are no longer an option, startups will need to focus on building a strong company culture and fostering employee loyalty. This could involve creating a respectful work environment and providing opportunities for growth and development.
Focus on Innovation: The ban on non-compete clauses could lead to a more dynamic labor market, with a greater flow of ideas and talent between companies. This could be beneficial for startups, as it could allow them to access a wider pool of skilled workers and potentially accelerate innovation.
Leverage Other Mechanisms for IP Protection: While non-compete clauses are gone, NDAs/trade secret laws can still be used to protect confidential information. Startups should work with an expert counsel to execute NDAs/PIIAs with all employees.
What to do now:
Review any existing non-compete agreements you have with employees (other than senior executives) and work with a counsel in removing/amending them.
Update template employment agreements in light of the final rule.
The FTC's final rule banning non-compete clauses will become effective 120 days after publication in the Federal Register.
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