Back in January 2023, the US Federal Trade Commission (FTC) announced a proposal to prohibit employers from requiring employees to sign noncompete agreements. After a public commentary period, the FTC voted yesterday to implement this proposed rule. Employers may no longer require noncompetes, and existing noncompetes are also considered null and void. An exception remains for existing agreements with senior executives, defined as those making more than US $151,164 per year and hold a policy-making role. The rule is set to take place in 120 days and is sure to face legal challenges.
There is evidence of noncompete agreements dating back to the 1400s. They began to gain prominence in the US in the 1800s and were state-level laws. For a nerdy deep dive into the history of noncompetes, read this. For many years, noncompete agreements were largely a factor for senior executives; employers used them to protect their trade secrets. Over time, this has changed to include many categories of workers, including fast-food workers and others with dubious access to trade secrets. The FTC’s position is that noncompete agreements make it hard for employees to leave a job, start a business, or in some cases have access to higher pay. The FTC also maintains that many employers could effectively protect their trade secrets through use of nondisclosure, or confidentiality, agreements or nonsolicitation agreements. An NDA prohibits someone from sharing confidential information that a person or business shared with them. A nonsolicitation agreement prevents someone from soliciting the staff or customers of the business they no longer work for.
So, what does this mean for third-party recruiters? In the short term, probably not much. It’s likely that court challenges will prevent this rule from going into effect while the lawsuits are underway. In the longer term, if the ban is implemented, third-party recruiters may see a more robust talent pool as more people feel they can actively seek a new role. Passive candidates may be more receptive to hearing about new opportunities if they’re not restricted by a nondisclosure agreement. This is a good time to counsel your clients to shift away from noncompetes in favor of nondisclosure and/or nonsolicitation agreeements and also which employees are covered by these.
