The Federal Trade Commission (FTC) has recently made a bold move to ban noncompete agreements nationwide, with major possible implications for business owners and entrepreneurs in Tennessee and the rest of the country. Current and future small business owners need to understand the implications of this new ruling and how it might affect their operations.
Understanding the FTC’s proposed rule
Noncompete clauses have traditionally been used by businesses to prevent employees from joining competitors or starting their own competing businesses, often for a specified period and within a certain geographical area. They often made signing a noncompete agreement a condition of employment. However, by a 3-2 vote, FTC commissioners determined that these agreements stifle competition and innovation. They proposed a rule prohibiting noncompetes for most employers in the U.S., with nonprofits a major exception. The proposed rule would also exempt existing noncompetes for senior executives earning more than a certain annual income.
Expected Outcomes for Small Businesses
The FTC anticipates several key outcomes from the new rule:
- Promotion of Entrepreneurship: By eliminating noncompetes, the FTC expects new business formation in the U.S. to grow 2.7% annually. This could mean an additional 8,500 startups each year, as individuals are free to leverage their skills and ideas without contractual restrictions.
- Economic Gains for Workers: With noncompetes out of the picture, workers could see an average earnings increase of $524 per year. The freedom to switch jobs without legal repercussions is predicted to increase wages as businesses compete for talent and workers leverage that into higher salaries.
- Stimulated Innovation: By encouraging entrepreneurship, the ban may also lead to a surge in innovation, potentially resulting in 17,000 to 29,000 more patents filed annually over the next decade.
Challenges for Existing Businesses
Despite the positive outlook for workers and the economy, the ban could pose challenges for existing small businesses:
- Protection of Trade Secrets: The FTC suggests alternatives to noncompetes, such as NDAs and trade secret laws, to safeguard sensitive information. Nonetheless, small businesses will need to reassess how they protect their proprietary information and client lists in the absence of noncompetes.
- Employee Retention Strategies: Employers are encouraged to attract and retain talent by improving wages and working conditions rather than relying on noncompetes.
Navigating Compliance
If this rule becomes permanent, it will affect how many small business owners in Clarksville and Springfield handle employees. A business attorney who watches how the law evolves can be an invaluable resource for setting policies and dealing with disputes.