FTC Bans Most Noncompete Agreements

Rule Opens Door for Title Agencies to Focus on Better Ways to Retain Employees
By Jeremy Yohe
Direct link to article on ALTA Title News website

THE FEDERAL TRADE COMMISSION (FTC) in April issued a final rule banning most noncompete agreements nationwide. The rule goes into effect Sept. 4, 2024. Immediately following the announcement, the U.S. Chamber of Commerce and other business associations sued the FTC to block the rule. Earlier this month, a federal court in Texas held the FTC likely lacked statutory authority to issue its rule.

Under the rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date. For existing noncompetes, employers will only be able to enforce them against “senior executives.” The rule does not apply to noncompetes negotiated as part of the sale of a business with the prior owner.

The rule does three main things:

• Businesses will no longer be able to enter into noncompete agreements with workers.
• Businesses can no longer enforce existing noncompete agreements—unless they cover certain senior executives.
• Businesses must provide explicit notice to both current and former employees that their noncompetes are no longer enforceable.

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC Chair Lina M. Khan. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

Cindy McGovern, CEO of Orange Leaf Consulting, sees this as an opportunity for employers to re-energize their teams.

“As a leader, the goal is to create an environment where people want to work, contribute, feel valued and their ideas are welcomed,” she said. “While the world is not always an even playing field and sometimes money does talk, research shows that people leave because of management, not money. So, we have an opportunity to use this change to prompt more conversation about professional development and career paths and to proactively show our team members they are seen, heard, valued and cherished.”

McGovern also reminds companies that they aren’t just competing with others in the title industry to keep employees, but the entire job market.

“This new rule is a great time for us all to look at our recruiting and hiring practices as well as our employee retention strategies so that we can continue to attract new talent to our industry,” she added. “I have always been a fan of attracting talent outside of the industry, as it brings fresh perspective and new ideas. This rule is an opportunity to seek that talent.”

Craig Haskins, president and CEO of Knight Barry Title Group, agreed that the rule provides an opportunity for title agencies to focus on better ways to retain employees by offering career advancement and more competitive salaries and benefits.

“Title agency owners should think creatively about how they can foster a work environment that naturally encourages retention without relying on the contractual limitations of a noncompete,” Haskins said.

Knight Barry has more than 400 employees and operates in Wisconsin, Minnesota, Florida, Texas and Michigan. The company hasn’t asked an employee to sign a noncompete in over a decade, but Haskins is paying close attention to the impact the rule will have on the industry. He estimated half of Knight Barry’s competitors use noncompetes.

“For us, this is a real chance to zero in on what makes our company such a cool place to work,” Haskins added. “We’re keeping our focus on career development, building a workplace culture that really supports one another, and continuing to provide benefits that really hit the mark for everyone.”

Executive search firm Anderson|Biro encourages companies to consult legal counsel to understand the implications of the noncompete ban. Noncompetes are often enforced inconsistently across states, which sometimes complicates career transitions for many professionals. This new ruling seems to standardize employee protections, leveling the playing field and potentially opening more job opportunities, according to Cory Biro, an executive recruiter with Anderson|Biro.

“Noncompete agreements have been common in many industries, including the real estate and financial services sectors, often restricting professionals from exploring new opportunities,” Biro said.

“The FTC’s ban is expected to increase job mobility and potentially lead to higher wages and a surge in innovations.”

The FTC proposal was spurred by the Biden administration’s executive order encouraging agencies to enact a “whole government” approach to encouraging competition. The final rule was approved by the FTC by a 3-2 vote along partisan lines.

Craig Haskins, president and CEO of Knight Barry Title Group, agreed that the rule
provides an opportunity for title agencies to focus on better ways to retain
employees by offering career advancement and more competitive salaries and benefits.

Under the rule, employers may continue to enforce noncompetes entered into before the effective date of the rule with senior executives. After the effective date, all noncompetes are banned pursuant to the FTC’s power to outlaw unfair and deceptive practices. This is the same authority the FTC is using for its proposed rule banning so-called junk fees. ALTA commented on that proposal earlier this year.

For employees other than “senior executives,” employers must notify all other current and former workers that any existing noncompetes are no longer enforceable. The FTC has developed model notices to meet this obligation. Those who use the model notices are granted a “safe harbor” for compliance.

What Is a Noncompete?
The rule defines “non-competition agreements” as any term or condition of employment that prohibits a worker from, penalizes a worker for or functions to prevent a worker from seeking or accepting employment with another business or operating a business.

Who Are Senior Executives?
There is a two-part test for determining who qualifies as a senior executive for purposes of existing noncompetes. A senior executive is someone in a policy-making position who earns more than $151,164 annually. The rules define policy-making authority to mean a company’s president, CEO or officer who has final authority to make policy decisions who control significant aspects of a business entity. It does not include individuals who only possess a right to advise on significant decisions or that only make policy decisions for a subsidiary of the entity seeking to enforce the noncompete. According to the FTC, fewer than 1% of workers are estimated to be classified as senior executives under the final rule.

Exceptions
There are two primary exceptions to the final rule. First, the FTC’s authority only extends to for-profit enterprises and doesn’t cover non-profit enterprises. Second, businesses can still obtain noncompetes from owners as part of the sale of a business entity.

Alternatives to Noncompetes
The FTC found employers have several alternatives to noncompetes that still enable firms to protect their investments without having to enforce a noncompete.

Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information. Researchers estimate over 95% of workers with a noncompete also have an NDA.

The FTC also finds that instead of using noncompetes to lock in workers, employers that wish to retain employees can compete on the merits for the worker’s labor services by improving wages and working conditions.

JEREMY YOHE is ALTA’s vice president of communications. He can be reached at jyohe@alta.org