For years, non-compete agreements protected small businesses by preventing key employees from jumping ship to join a competitor. But a recent Federal Trade Commission (FTC) ban on such agreements gives your employees greater freedom, which only intensifies the challenge of retaining your top employees.
Fortunately, small business owners can still work toward creating a workplace that fosters company loyalty and improves company retention.
What the Ban Means for Your Business
According to a recent article in the Wall Street Journal, the FTC ban has brought mixed reactions. While employees celebrate the freedom they have to explore other roles, some employers are pushing back against the decision.
It’s easy to understand why. A ban on non-compete agreements raises the possibility that some employees might leave your company, taking valuable knowledge and experience to your competitors.
According to Gallup, the cost to replace a salaried employee can be 1.5-2x their annual salary, meaning thousands and thousands of dollars.
The Ban in Summary
The FTC banned most non-compete clauses between employers and workers, with exceptions for existing agreements with high-earning executives and certain business sales. This rule applies to employees, independent contractors, and volunteers. However, it’s unclear if it applies to non-profits.
The key points for employers are:
- Wait and see: The rule faces legal challenges and may not take effect. There’s no penalty for existing non-compete agreements.
- What is Banned: Almost all new non-compete agreements and existing ones for non-executives.
- Exceptions: Existing non-compete agreements for “senior executives” earning over $151,164 and sale-of-business situations.
- Notice: Employers must notify impacted workers before the effective date (likely around September 4th, 2024). The FTC provides sample language for these notices. However, the FTC’s rule is currently being challenged in court, and it’s unclear if it will be enforced. Hold off on sending them until closer to the (currently uncertain) effective date.
- Non-Profits: The rule’s applicability to non-profits is a point of contention. Stay updated on court challenges to see if the final ruling exempts non-profits based on their tax status.
- Explore Alternatives: Nondisclosure agreements and non-solicitation agreements (with limitations) are still allowed. “Garden leave” (paying a leaving employee) and fixed-term contracts remain options.
- Impact: Employers may need to adjust hiring and retention strategies.
The rule aims to increase worker mobility and competition while facing legal challenges. Companies should monitor the situation and consider seeking legal advice.
Next Steps for Businesses
Remember, this is a rapidly evolving situation. By staying informed, adopting a wait-and-see approach, and exploring alternative methods, employers can minimize disruption and adapt to the changing landscape.
As the legal landscape unfolds, we recommend thinking about the below:
Identify Senior Executives
In the wait and see period before the notice deadline, companies should strategically utilize this time. One key action item is identifying which current “senior executives” might qualify for the exception to the non-compete ban. Remember, these are individuals who not only make over $151,164 annually but also hold decision-making authority for the entire organization, aligning with the SEC’s definition of an executive officer.
By pinpointing these key personnel, companies can then determine if there’s a strategic advantage to having them sign new non-compete agreements before the rule’s effective date, assuming it’s upheld in court. This would require careful consideration, as the legal landscape is still developing. Consulting with legal counsel can help navigate the potential benefits and drawbacks of pursuing new non-compete agreements with senior executives.
Explore Alternatives
While non-compete clauses are largely off the table, there are still ways to protect your business interests. Non-disclosure agreements (NDAs) remain a strong option to safeguard confidential information like trade secrets. You can also explore carefully crafted non-solicitation agreements that focus on preventing the employee from soliciting clients or colleagues, but be mindful not to restrict their ability to find new work altogether.
Additionally, “garden leave” arrangements, where a departing employee continues to receive pay and benefits but isn’t actively working, can offer a buffer period. Finally, fixed-term contracts can be used for specific projects or roles, though they come with their own legal considerations. It’s always wise to consult legal counsel as this is a complex situation.
Focus on Building a Strong Company Culture
While major employers are looking to reverse the ban, it’s unclear how successful these efforts will be. In the meantime, small businesses will have to redouble their efforts in creating a strong company culture.
Think of the ban as an opportunity. Now is your chance to evaluate your current workplace culture and develop new retention strategies for the future. Here are some strategies that can help you retain your most valuable employees.
Focus on Competitive Compensation and Benefits
Your employees will be less likely to search elsewhere when they feel valued and well-paid. Conduct regular salary reviews and communicate your schedule for raises or bonuses. Offer competitive benefits packages that go beyond healthcare, such as retirement options and matching contributions.
If your business is small, consider non-monetary benefits such as additional time off or paid leave to work on community volunteer projects. Even unpaid benefits can have a surprising impact on helping employees feel valued.
Offer Flexible Working Hours
Many employees seek that coveted work-life balance, and they can find it when their employer offers flexible working hours. For some, this is a simple matter of giving employees leeway on their starting and ending times. In other cases, you can allow employees to work from home on a hybrid work schedule.
This is nothing new. Recent research shows that 35% of workers who can work from home currently do so on a full-time basis, while 41% work on a hybrid schedule. This can be ideal for retaining busy parents or just giving your workers the breathing room they need to feel comfortable in your workplace.
Invest in Professional Development
Data from Pew Research Center shows that 63% of workers who quit claim that their employer provided “no opportunity for advancement.” You don’t have to offer every employee a career track, but it may help to invest in professional development resources to give workers a greater reason to stick around.
Professional development can take many forms. You might give your workers an opportunity to attend local conferences or industry events. You could also invest in online training through popular sites such as LinkedIn Learning or Udemy. Employees will appreciate the chance to learn and grow and may be less likely to search elsewhere for employment.
Create a Positive Work Environment
Your workplace culture has a major impact on your employees’ well-being. Fostering a culture of collaboration, communication, and mutual respect will help employees feel supported, valued and understood. Consider instituting a mentoring program where employees can connect with experienced workers. This creates a web of relationships that deepen your team members’ connections to each other and the company itself.
Recognizing your employees’ contributions can also help them feel like part of a team. Go beyond “employee of the month” programs by featuring individual bios on your social media channels or publicly recognizing employees at workplace events.
Foster Open Dialogue
Do you know your employees’ career goals? If not, it never hurts to ask. By learning what your workers’ long-range goals are, you can better align your processes and culture so that workers feel supported in their ambitions.
Some HR managers go as far as to conduct employee engagement or “pulse” surveys. These periodic surveys can provide a valuable “temperature check” and identify struggling employees early on. This allows you to intervene and develop retention strategies before receiving the two-week notice.
Build a Winning Team
As a small business owner, you know that every challenge is also an opportunity. By focusing on building a strong employer brand, you can win the retention race and keep your best people on board. Focus HR can help! Contact us to request a consultation if you need HR advice for your small business.
