What the End of Non-Compete Agreements Could Mean for Small Businesses and Startups

Can you believe that we reached the end of season five of the Own Your Genius podcast? This season, we challenged some misinformation floating around the internet as it relates to intellectual property and business formation. We spilled some legal tea, and we challenged our mindset to not only make us better business owners, but also make us better people just in general. Let me know in the comments what your favorite episode of this season was. 

Welcome back to another episode of Own Your Genius, where we empower entrepreneurs to use their education and their experience to create dope stuff. I’m your host, Attorney LaConya Murray. Listen, there’s a major change coming to the relationship between employers and employees that can benefit you as an aspiring business owner. But before we dive into today’s episode, you already know what to do. Make sure you subscribe to the podcast, so you don’t miss any insights on how to own your genius. 

Welcome back to the Own Your Genius podcast where we discuss building businesses, growing brands and what else? Only your genius. I’m your host, Attorney LaConya Murray, owner of Off The Mark IP Solutions. Off the Mark is a boutique intellectual property firm representing innovative entrepreneurs aka geniuses who are looking to protect their brand and grow their business with ongoing legal support and business mentorship. We have a good one for you today, so let’s get started.  

Many companies here in the US use non-compete agreements, also known as covenants, not to compete as a way of protecting their business interests when working with employees. A non-compete agreement is a legal contract or a clause within a contract that is typically signed at the beginning of the employment relationship that restricts an employee from competing with the business directly or indirectly from some specific duration of time after employment has ended. Some of those key aspects of a non-compete agreement are that restriction on competition, like I talked about. The agreement will prevent employees from working for their competitors or starting competing businesses for a specific duration of time after leaving the company. They also protect trade secrets because then it prohibits employees from sharing proprietary information or secrets with others during or after their employment. And the main thing about non-compete agreements, they’re not just infinite, right? There is a limitation on how long they can prevent someone from working and preventing them and what they can do. The term often includes the length of time of restriction, it includes the geographical area and the specific market or field in which the employee is restricted from working. You can’t just say, hey, you can’t work for a competing company forever. Like, yes, that can’t be a period at the end of that. 

 It would typically need to be a one-to-two-year term within a specific geographical area. And if I was an engineer, right, but I want to go into some other position with the company, there might be a restriction on that. It will be hard to restrict me from doing something else that wasn’t related to the work that I was doing within that company that had me sign the non-compete agreement. So that’s kind of how that works. The non-compete agreement. The other thing you should know about the non-compete agreement is that depending on how valid it is in the enforcement of the non-compete agreements, because that can vary by jurisdiction. It’s not a federal thing. It might require the employer to provide some form of compensation during that restriction period. Because if I can’t work and I’m not working for you, how am I getting paid? The question is, how can any of that, any of those things that we just talked about in that non-compete agreement, help employers protect their business interests? 

I think that’s a great question. Here are some of the common ways and reasons that employers use non-compete agreements. One, it’s going to protect your confidential information. If I can’t work for another company, then I can’t give away the information. Employers want to make sure that they protect their sensitive information, such as trade secrets and client lists and pricing strategies and other proprietary methods. Non-compete agreements prevent employees from taking valuable information and going to a competitor using it for their own advantage. And in that way, what they’re doing is really preventing competition, right? Employers use this non-compete agreement to prevent employees from working for a competitor company or starting their own. They also use non-compete agreements to prevent the employee from developing competing products or providing competing services and recruiting former colleagues to join their new business, even though, you know, that can be addressed to a separate agreement. And by using a non-compete agreement, they can retain talent because listen, it takes a lot of time and money to hire and train someone. And if you’re making that type of investment in someone, you want to make sure that they’re going to stick around for a while. So now by using the non-compete agreement, employees can retain skilled and experienced staff because it discourages employees from seeking employment elsewhere in the same industry. 

I’ve already talked about how non-compete agreements in the United States are frowned upon because of the impact that they have on an employee’s choice of employment. But now, now they have undergone significant changes. On April 23rd, the Federal Trade Commission, which is also known as FTC, issued a final rule that bans non-compete clauses nationwide. And they did this so that they can promote competition and increase workers’ freedom to change jobs. They expect that this new rule will foster new business formation, raise wages, and boost innovation. Here’s some things that you need to know about this new ban. First, it’s going to affect almost 30 million workers who were subject to non-compete agreements. This new rule will make existing non-competes unenforceable for most workers after the rule’s effective date. Can you imagine that entering into a contract and then the federal government’s like, you know what, no, we don’t like that anymore. For 30 million workers, that can be the case. Even though the ban on non-compete agreements will be proactive, it’s not going to affect senior executives. Existing non-competes for senior executives who represent less than 1% of workers can remain in force. 

However, employees are banned from entering or accepting enforce any new competitions, even if they involve senior executives. If you are a senior executive and you’re under this non-compete clause, your non-compete agreement or clause will remain in effect. But if you’ve been hired for this role as a senior executive, they can’t force you to sign a non-compete. And also, under this new ban, employers will be required to provide notice to workers and other senior executives who are bound by Existing non-compete agreements that they will not be enforcing the non-compete against them. It’s not like this little secret They can just keep and hope no one finds out they have to give the workers notice that hey Your non-compete agreement is void So when does this take effect, so they made the ban on April 23rd. It’s going to become effective 120 days after publication in that federal registration. If April 23rd was when it was published, then we can see this being taken effect somewhere around late August. But this is what you need to know is that people aren’t just laying down and taking this, right? It’s going to affect a lot of business owners. We can expect some ongoing legal challenges, which actually could impact the start date or enforcement date of the ban.  

What I would say if this were something that you’re concerned about, make sure that your legal counsel and just, you know, stay tuned to the latest news updates just so you know what’s going on. Now for those of you who are business owners and you’re using non-compete agreements to protect your business interests, you’re like, okay, if this ban goes into effect, how in the world am I going to, you know, make sure that my business is protected? There are some alternatives that you can use and we’re going to go over just a couple of those. If you are concerned about your confidential information getting out, you can use a non-disclosure agreement because these agreements prevent employees from sharing confidential and proprietary information with others during and after their employment. You can also use non-solicitation agreements if you’re worried about someone stealing your client list or your employees because this contract restricts former employees from soliciting the company’s clients and employees for a certain amount of time after leaving the company.  

You can go, and you can start your business. You know, they can go, and they can start the business, but they can’t take your client list and they can’t take your workers with you for a period, of course. And then trade secrets, because we know as business owners, there are things that we do that give us a competitive edge. And a lot of times we need our employees to help facilitate that. When they leave, we have this huge fear, oh my gosh, they’re taking my proprietary information with them. And you can rely on the fact that it’s a trade secret to protect you when that person leaves. And we have an episode about trade secrets. You can check episode 108 for more information about trade secrets.  

There’re also things that you can put in your employment agreements that will require employees to repay certain benefits like training costs if they choose to leave the company within a specific time frame. I know I have a client that offers dental, what is it, dental school assistance. Yeah, she sends her people to dental hygiene in school, but they must stay and work for a certain amount of time. And if they don’t, then they have to repay what was invested in their training. Things like that to make sure that it’s not a total loss. And if you’re worried about your intellectual property, you can make sure that you have assignment clauses and agreements signed by the employee.  

And then one final thing you can do is, even though they can leave, even though your employee can leave, you can require them not to work while they’re getting paid. So if they put in their two-week notice, all right, you can say that, hey, while we’re paying you, you can’t go work anywhere while you’re getting paid by us. And what that’ll do is deter them from going to your competitors immediately. That’ll give them, you know, give you a little bit of time. So those are just some things that you can do to protect yourself if you feel like this non-compete, if you feel like the ban on the non-compete agreement is going to affect your business. But let’s talk about the new and expiring businesses. This ban on non-compete agreements is expected to have a significant impact on startups and small businesses in several ways. First of all, one thing it’s going to do is increase the talent that’s in the market because if people are no longer restricted by non-compete agreements that means they can leave jobs they’re not satisfied with and there can be in this pool of talent that you might use for your startup or new business, also innovation.  

The FTC estimates that the ban will lead to an increase in new business formation by almost 3% per year, which can result in almost 9,000 additional new businesses each year. And the fact that we have these new businesses in commerce could really foster a more dynamic and innovative business environment. Because you can’t be in business if you’re not solving a problem. These new businesses can help come up with creative ways to solve problems and I think what it’s also going to do is create a culture shift because startups and businesses, they might need to focus more on creating, um, strong culture in their company to retain employees rather than relying on non-compete agreements to prevent them from leaving. So now you’re going to be nice to folks, right? You’re going to have to treat them right. You might have to pay them right. And just create an environment where people want to come to work. And finally, the way that the, the ban on non-compete agreements, can affect small business owners and startups is that the startups and the small business owners still have to consider the intellectual property and the contracts that the former employees signed with their employer, right?  

I think overall, this ban can be a positive development for startups and small businesses and encourage more competition, innovation and a healthier job market. But, you know, there might also be some concerns about protecting trade secrets and intellectual property. And if that’s the case, there are other agreements that we can use to protect those interests.  

Geniuses, thank you so much for tuning in to our final episode of the season. What are your takeaways from this week’s episode? If you find today’s podcast insightful, make sure to share it with some fellow entrepreneurs and don’t forget to subscribe, rate, and leave a review.  

Until next season. 

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