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What You Need to Know About the New FTC Non-Compete Ban
In late April, the FTC voted to finalize and promulgate their Non-Compete Rule which prohibits the inclusion or enforcement of non-compete clauses in most employment agreements. Industry experts from FP Transitions and Key Bridge Compliance sat down this week to discuss the details of the Rule, the level of concern business owners in the industry should have, and which other means advisory owners have to protect their business. You can listen to the full discussion here.
Below are essentials that you need to know about the FTC’s Rule.
When will the FTC’s rule take effect?
September 4, 2024.
Is there a notification element of the Non-Compete Rule?
Yes, employers are required to notify any current or former employees that any non-compete clauses in their employment agreements are no longer enforceable. The notification is required to be made in writing: letter, email, and text messages are all acceptable. Written notifications must be made prior to or on the date the rule takes effect.
Are there any exceptions written into the rule?
The most relevant exception is that the ban does not apply to senior executives (who make a minimum of $151,000) have policy making authority and are already subject to a noncompete prior to the Rule’s effective date.
Does the FTC’s rule also prohibit Non-Solicit, Non-Acceptance, and other Restrictive Covenants in Employment Agreements?
No, other Restrictive Covenants like those listed in the question, as well as NDAs and confidentiality clauses are not restricted by the FTC’s rule.
Which states already have non-compete bans or restrictions?
At the time of publication there are four states with full bans on non-compete clauses – California, North Dakota, Minnesota, and Oklahoma. There are 35 other states that have some sort of restrictions related to noncompetes – the full list and details can be viewed here. It’s also worth noting that several states are currently considering imposing new restrictions or strengthening those already in place.
How has the rule been received amongst business owners, regardless of industry?
The FTC reports that during the 90-day public comment period for the rule, they received over 26,000 comments, over 96% of which were in support of the ban. However, there are a handful of challenges to the rule in state courts, including one in Texas that’s expected to deliver a final decision later this month.
How is the FTC’s rule most likely to impact financial advisory and wealth management businesses specifically?
As we discuss in this week’s webinar, our experts think the FTC’s Rule will have minimal impact on financial advisory businesses as there are other legal and functional safeguards that can be leveraged. While the value of these businesses are closely tied to their client relationships, other restrictive covenants–like non-solicits and non-acceptance clauses–are more appropriate for protecting against any actions that threaten retention of clients, protection of private business details, and preservation of business value than non-compete clauses are.
In fact, in our experience consulting with wealth management firms on entity structure, corporate governance documents, and employment agreements, most advisory owners already tend to decline the use of non-compete clauses. Instead, they opt for these more targeted clauses and language.
In what other ways can I preserve client retention and protect business value?
In order to preserve business value, protect confidential details, and retain clients, advisory business owners can leverage other restrictive covenants in their employment agreements as we discussed above. Additionally, they can also take a more offensive approach to retaining staff in the first place through competitive compensation, equity opportunities, and attractive company culture. Owners can similarly ensure client retention and eliminate any inclination to move with an exiting advisor by creating a best-in-class client experience, building trust, and creating a team to service the client as opposed to an individual advisor. Dive deeper into these retention strategies here.
