Beyond Non-Compete Agreements: 4 Best Ways to Protect Your Business
By: Zoe Stanley-Foreman
There’s been a lot of discussion about non-compete agreements, especially with the Federal Trade Commission’s (FTC) recent proposed ban. Even before all this, there was plenty of debate between employers and employees about whether they’re fair or even effective.
Should (and can) employers use them? What are the pros and cons of non-competes? And if they aren’t the answer, how else can businesses protect themselves?
Read on for everything you need to know about non-compete agreements, the current legalities behind them, and some alternatives employers can explore.
What is a non-compete agreement?
The FTC estimates that nearly one in five (30 million) American workers are bound by non-competes. We hear this term used a lot, but what does it actually mean? Here’s a non-compete agreement definition from Investopedia:
They also typically prevent employees from sharing trade secrets or proprietary information during or after employment.
These agreements all look a bit different, but all of them include the following:
- How long employees must avoid working for a competitor
- The type of work or services ex-employees aren’t allowed to provide
- What’s considered “competition”
- The consequences of breaching the agreement
Some non-competes also restrict employees from working with competitors in specific markets or locations.
However, it’s important to note that non-competes aren’t legally enforceable nationwide—this varies widely by state.
For example, North Dakota and Oklahoma don’t enforce non-compete agreements. California doesn’t recognize them, and employers there can face lawsuits for trying to enforce them.
Other states like Hawaii and Utah are cracking down, limiting non-competes to specific industries and time frames.
What are they used for?
The main goal of a non-compete agreement is to help businesses keep their competitive edge by protecting proprietary information, trade secrets, and intellectual property.
Without them, there’s nothing stopping ex-employees from sharing confidential details with competitors or starting their own business—potentially harming their former employer’s market position.
Some businesses use them as an employee retention tool. Non-compete agreements make it harder for employees to switch jobs within the same industry, discouraging them from leaving.
Since non-competes keep ideas and information from spreading, some also argue they encourage competitors to keep innovating, driving the industry forward.
The problems and challenges with non-competes
In a nutshell, non-compete agreements are very tough to enforce. A typical non-compete tends to be poorly written and, in most cases, may not be enforceable even if it’s well-written.
Not only this, but these agreements can be incredibly harmful to workers.
They restrict where and when employees can take their next job, making it hard to find a new role in the same field and often trapping them in positions they’d rather leave.
If workers decide to quit before their non-compete is up, they face some tough choices: switch to a different or lower-paying field, relocate, leave the workforce, or deal with costly legal battles.
The US Department of the Treasury’s Office of Economic Policy found that less than half of those under non-competes have access to trade secrets. This is especially common in lower-paying industries, where they mainly use non-competes to reduce turnover.
Even though workers in these fields usually don’t handle confidential information, their job search is still limited. This ultimately prevents them from finding better pay and improved working conditions.
FTC non-compete ban: latest news and impact
The Federal Trade Commission (FTC) recently announced a new Non-Compete Rule that would ban all new non-compete agreements starting September 4, 2024.
Under this rule, existing non-competes with senior executives (those in policy-making positions earning more than $151,164) could remain in force. However, existing non-competes with all other workers would no longer be enforceable after September 4th.
The FTC estimated that this ban could lead to a yearly 2.7% increase in new businesses, translating to over 8,500 new businesses. They also expected this to cause the average worker to make an additional $524 annually.
However, on August 20, 2024, the District Court for the Northern District of Texas blocked the rule. It found that the FTC over-reached its power and couldn’t enforce the rule nationwide.
As a result, this ban won’t take effect in early September. So, employers aren’t required to update their non-compete policies for now.
Top 4 alternatives to non-compete agreements
Even though this ruling was overturned, state regulations on non-compete agreements might still tighten up in the future. There’s also talk that the FTC will appeal the decision soon.
Regardless, employers should consider implementing policies and post-separation agreements that discourage former employees from competing, disparaging the company, or soliciting employees or vendors.
While there’s no foolproof way to prevent competition, here are some strategies we recommend to safeguard your business without relying on a non-compete agreement:
1. Implement strong internal controls.
Ensure you have strong internal controls to protect confidential information by preventing employees from moving company information to personal devices. For example, create a policy requiring employees to use company property rather than their personal devices for work purposes.
You should also establish a solid IT protocol for extra security, possibly with the help of an external IT firm.
2. Develop and enforce structured policies.
Create well-structured policies for proprietary information, non-solicitation, company property, and confidentiality. It’s essential to use language that clearly outlines what is considered company information.
While these policies can’t be enforced post-employment, they still serve as stark reminders during an employee’s departure.
The FTC also suggests leaning on existing trade secret laws and using non-disclosure agreements (NDAs) to protect any sensitive information. Recent data shows that over 95% of employees with non-competes also signed NDAs.
3. Revise your separation and severance agreements.
Update your separation or severance agreements to address confidentiality, company property, proprietary information, and vendor/employee solicitation. Again, these are good parting reminders to employees about these policies.
It’s critical that these documents are drafted and reviewed by an employment attorney to ensure they’re legally sound and enforceable.
4. Clearly communicate employee departures externally.
Revise your offboarding process to include clear messaging about an employee’s departure. The goal is to inform fellow employees, vendors, partners, and clients about the change and direct them to their new point of contact.
Be very specific about what the departing employee should include in their auto-response message. It’s far better for the employer to take control of the narrative rather than leave it to the former employee.
While there are plenty of alternatives to non-compete agreements, it’s nearly impossible to 100% eliminate competition.
Beyond the suggestions above, we recommend taking a more holistic approach. Consider abundance as a business and focus on what you can control—including providing high value to clients, customers, vendors, and partners.
That way, those folks aren’t necessarily tied to one individual employee but rather to your organization and the value it provides them.
Are you looking for more support in protecting your business while being conscious of potential non-compete restrictions? Our team can help build policies with you or pull in an employment attorney as needed. Contact us to learn more!
Zoe Stanley-Foreman is the founder of Quill & Pine Digital Marketing and a content marketing extraordinaire. She’s passionate about helping small businesses worldwide achieve their top digital marketing goals. Connect with her to see how she can make your content marketing dreams come to life one blog, email, and article at a time.
