In a move with profound implications for the American workforce, the Federal Trade Commission (FTC) has voted 3-2 to ban noncompete agreements, a common practice where companies restrict employees from joining or starting competing firms for a specified period. This decision, however, is already facing legal challenges, leaving the fate of the ruling uncertain. 

Noncompete agreements have long been a contentious issue, affecting approximately 30 million workers, or roughly one in five employees in the United States. The FTC in their decision argues that these agreements harm workers by limiting their ability to seek better-paying jobs, thereby impeding overall wage growth. Moreover, by reducing job mobility, noncompete agreements create barriers to employment opportunities for workers not subject to such restrictions, ultimately impacting the economy by constraining the ability of businesses to hire needed talent. 

In response to this ruling, The U.S. Chamber of Commerce has promptly filed a lawsuit against the FTC, contending that the agency exceeded its authority in issuing the ban. According to the Chamber, the FTC lacks the power to define unlawful competition methods and enact a sweeping prohibition on noncompete agreements. 

However, the FTC stands firm in its assertion that its mandate includes preventing unfair competition practices, which encompass noncompete agreements that curtail economic freedom. An FTC spokesman emphasized the agency’s legal authority and commitment to defending the ban in court. 

So, what do you and your agency need to know? What are the key provisions of this ruling? Answers to those questions are below: 

What about other types of covenants and restrictions in Employment Agreements?  

Noncompete agreements are distinct from non-solicitation, non-disclosure, and no-business clauses, which means those other agreements will remain unaffected by the ban if they do not hinder workers from changing jobs or starting new ventures. 

How could this affect the selling of an agency?  

The draft rule unveiled last year included an exemption for certain noncompete clauses between the buyer of a business and a seller, but the usefulness of this otherwise helpful exclusion was diminished because it only applied to sellers holding at least a 25% ownership interest in the entity. In its April 2023 comment to the FTC, the Big I National urged the 25% ownership stake restriction to be eliminated. Our advocacy efforts proved successful, and we are happy to report that the FTC has done so in the final rule.  

The regulation now does not restrict one’s ability to enter or enforce a non-compete agreement with a person “pursuant to a bona fide sale of a business entity, of the person’s ownership interest in [the] entity, or of all or substantially all of a business entity’s operating assets.” 

What about the currently existing NonCompete Clauses?  

Noncompete agreements in place for senior executives earning at least $151,164 will remain enforceable, while those involving other workers will become unenforceable after the rule’s effective date, thus this will impact most existing clauses. Employers must provide notice to affected employees regarding the nullification of existing agreements. 

What will this do to current state laws?  

The FTC’s rule is designed to preempt any conflicting state laws. 

When does this go into effect?  

The rule is set to become effective 120 days after publication in the Federal Register, pending legal challenges which have already begun. So, we presume this could be going on for quite some time. We will continue to keep you updated as things progress.  

For independent insurance agents, understanding the implications of what this noncompete ban entails is important but more so knowing what you may have to do as a manager or agency owner if this does go into effect. While the ruling aims to enhance job mobility and competition, its implementation faces significant legal hurdles, and we presume will be tied up in the courts for some time.  

The outcome of legal battles will determine whether the ban ultimately takes effect, underscoring the uncertainty surrounding this ruling by the FTC. As the debate continues, we will continue to be your advocate and work with our partners at the Big I to oppose this ruling.  

So, what steps should I take as an Agency Owner? 

1. Review the new rules and prepare for compliance 
2. Review employees and determine which ones have signed noncompete agreements in place. 
3. If the rule goes into effect, you will need to formerly tell them the noncompete is no longer valid. 
4. The importance of non-solicitation agreements, which are still legal, will increase in importance.  Work with OIA or your employment attorney to draft new agreements that will be valid and include non-solicitation, non-piracy, and confidentiality agreements.  
5. Prepare to communicate to employees what they can and can’t do under the new rules. For example, a producer may be able to leave and start their own agency, but they won’t be able to solicit your/their current roster of clients for a certain number of years.   

If you have additional questions about the ruling, or our advocacy efforts or want additional information please contact John Wells, OIA’s Government Affairs Manager at john@ohioinsuranceagents.com.

If you have questions on how you can prepare for this potential change or how to safeguard your business as we navigate these uncertain waters, please contact Brian Lawrence, OIA’s Director of HR Solutions at brian@ohioinsuranceagents.com.