FTC's Proposed Ban on Non-Competes and How It May Affect Small Businesses

On January 5, 2023, Federal Trade Commission (FTC) proposed rules of a total ban on non-compete agreements. The rules will ban all employers, including small businesses, from imposing non-competes on their workers. The FTC's ultimate goal is to encourage competition and increase workers' wages.

The FTC’s new rule would make it illegal for an employer to:
  • enter into or attempt to enter into a non-compete with an employee or independent contractor;
  • maintain a noncompete with an employee or independent contractor; or
  • represent to an employee or independent contractor that he or she is subject to a non-compete.
The rules will apply not only to employees but also to independent contractors. The rules will not ban confidentiality or non-solicitation agreements. However, an employer cannot mask a non-compete as a broad confidentiality agreement. If an agreement is so broad that it will effectively prevent the worker from seeking or accepting employment with another person, or operating a business, such agreement will likely be found a "de facto" non-compete. 
The rules provide for a narrow business sale exception where one person sells his ownership interest in a business. 

The rules are subject to a 60-day public comment period through March 10, 2023. The FTC will then move to finalize the rule. If finalized and published, the rules will supersede all state laws. California already refuses to enforce non-compete agreements, as well as D.C. Even if finalized, however, the rules will likely be subject to challenge in courts. 

What does this mean for small businesses?
As proposed, the FTC rules will make it difficult for small businesses to retain and keep key workers, although California and D.C. have already implemented some versions of the ban. Without non-competes, small businesses will be forced to increase wages while still trying to keep costs down.
But even in the increasingly pro-competition economy, small businesses can still find ways to protect their business. Here are several potential examples. 

  • Be creative in motivating your workers and potentially including them in profit sharing, which will create initiatives to stay with the business.
  • Monitor the job market and see what competitors normally offer to workers in your industry. Be competitive in what you offer your workers, not only in salary but also in benefits, perks, and, most importantly, the work culture. There are many HR companies that can help you stay competitive as a small business employer. 
  • Protect your trade secrets through confidentiality agreements and cultivate a trade secret culture.  Revisit and revise non-disclosure and non-solicitation agreements to maximize all possible protection under the current laws. Utilize the business sale exception whenever possible.

This blog is not legal advice and provides general information only. If you need advice regarding a non-compete agreement, please consult with an attorney.
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