The world is a bit of a scary place right now, especially if you’re anywhere near Russia. As war continues to wage and Putin gets more aggressive with his rhetoric, it’s pushing a response from surrounding countries. Recently, Germany has been discussing a conscription effort to boost its military. That feels a bit eerie considering the last time Germany and Russia were involved in a big war.

Russia doesn’t seem to be taking seriously the sanctions placed on it by countries across the globe. Limitations like these are being used to hopefully curb aggression. 

But what about when limitations are imposed on your Indianapolis business… or helpful ones removed? 

The FTC made big news last month when they banned noncompete clauses for US businesses. The very next day, the US Chamber of Commerce and other groups filed suit against the FTC, seeking to block the ban.

It’s an interesting case for businesses, for sure, and worth knowing more about. And while it may not affect your industry, the verdict in the fight over noncompete clauses will affect the US job market as a whole and present some new challenges for business.

Changes to Noncompete Clauses to Note, Indianapolis Businesses
“Loyalty is a two-way street. It thrives on trust, respect, and a shared vision for the future.” – Ken Blanchard

Noncompete agreements are clauses in employment contracts that restrict what a former employee can do after they leave your company. All kinds of workers are asked to sign them, from executives to hourly employees, and statistics show that 38 percent of the workforce will encounter them during the course of their careers.

They’ve been a hot topic lately, especially with the Federal Trade Commission (FTC) banning them for most workers in April 2024.

The US Chamber of Commerce fulfilled their promise to sue over this rule, saying, first, that it’s an overreach of authority. They believe noncompete clauses have traditionally been regulated at the state level, and the FTC is infringing on that established system, which only Congress should have the ability to change.

Secondly, the Chamber claims the ban hurts businesses in a few ways — making it harder to protect confidential information and discouraging investment in employee training if workers can freely leave and take that knowledge elsewhere.

But the FTC maintains it has the authority to regulate unfair business practices and that noncompete clauses stifle worker mobility and wage growth.

This brings up interesting questions:
– Are noncompetes a legitimate shield that protects your secrets?
– Or are they just a way to keep good talent hostage?

There are obviously differing opinions, so let’s briefly explore both sides of this.

Arguments For

Many business owners love the idea of noncompetes. They can help you protect your confidential company information, like customer lists or trade secrets, from falling into the wrong hands. 

Imagine a salesperson jumping ship to a competitor and taking your entire client base with them – that’s a nightmare noncompetes can potentially prevent.

Arguments Against

Studies by the Federal Reserve Bank of Minneapolis show that enforcing noncompete agreements can be a hassle, with over half of surveyed employers admitting they rarely follow through with lawsuits. 

Other studies show that noncompetes can restrict job mobility, reduce wages, and discourage the startup of new firms.

And that’s essentially what the FTC said in their statement about the ban, adding that noncompetes stymie labor efficiency and hinder competition.

What’s Next?

If it stands, the ban wouldn’t take effect for a few more months, but it would nullify all existing noncompete agreements currently in place (except for some senior executives).

So if you can’t use them for most workers going forward, what are other ways to help you protect your business interests? A couple of ideas…

Strong Non-Disclosure Agreements (NDAs): These legally binding contracts prevent employees from divulging confidential information, even after they leave.

Focus on Building Loyalty: Invest in your employees’ growth and development. When they feel valued, they’re less likely to jump ship.

While the FTC’s ban is a big deal, it doesn’t mean the noncompete conversation is over. There are still situations where noncompete clauses might be enforceable, like for executives with access to highly sensitive information. And rules will still vary some from state to state.

So workers will become more mobile, which could spark innovation overall. For employers, there will need to be a new approach to legal agreements, training investments, and worker retention strategies.

The long-term effects here are obviously unknown, so time will tell if the net effect will be positive or negative. As is often the case, it will probably be a little bit of both, and in my experience it’s best for Marion County employers to try and look at these challenges as opportunities.

Always adapting with you,

John R. “Rusty” Helms, C.P.A., CGMA