Non-compete agreements should no longer stifle entrepreneurship

On Behalf of | May 20, 2024 | Business Formation

Entrepreneurs hoping to start a new business often create contracts as a way of protecting their interests. However, for some people, existing contracts may be the main issue deterring them from starting a new business.

People who accept positions with existing companies often have to sign contracts that restrict certain future behaviors. Including non-compete agreements in employment contracts has long been a common business practice. Non-compete agreements have historically had a chilling effect on entrepreneurship, as many of the best and brightest were at risk of lawsuits brought by their former employers if they attempted to start their own companies.

A recent new rule enacted by the Federal Trade Commission (FTC) might make some people with original business concepts feel more comfortable about actually starting a business.

Companies can no longer enforce non-compete agreements

A non-compete agreement is essentially a contractual agreement to neither start a competing business nor work for an existing competitor. Such agreements typically only apply to a certain geographic region and for a specific amount of time after an employment arrangement ends. Employers could then enforce non-compete agreements by filing lawsuits against former employees.

Litigation could lead to financial penalties or a court order forbidding someone from continuing to engage in certain economic activities. The threat of an employer lawsuit was enough to prevent many people with potentially viable business ideas from acting on those ideas. Even the cost of defending against the lawsuit when the worker believed that they had not violated the contract was often enough to intimidate some people out of starting their own businesses.

The new FTC rule does not just prohibit employers from adding non-compete agreements to new work contracts. The rule also effectively prohibits the enforcement of non-compete agreements from existing contracts. Employees who took jobs years ago may now have more freedom to move on to a different position elsewhere or to pursue their dream of becoming their own bosses.

Careful compliance with the law is crucial for the protection of someone pursuing an entrepreneurial endeavor. Learning about significant changes in state and federal policy may benefit those who have let contracts hold them back from pursuing their dreams.

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