The FTC’s 2024 Employee Non-Compete Ruling: Potential Impacts for Franchisors and Franchisees

The FTC’s final ruling on employee non-compete clauses could create a significant shift in the landscape of labor and employment regulations if it passes current legal challenges. This change impacts employees of all businesses, but we’ll explore how these changes may impact the franchise sector specifically.

Overview of the 2024 Employee Non-Compete Clause Rule

For those new to the 2024 non-compete ruling, here’s a quick overview of the rule. We aren’t lawyers, and some of our legal franchise friends have written more extensive recaps you can hunt down (check out this deeper dive from Saxton & Stump ), but here’s our take at Franchise Business Review : There will be several challenges to get this ruling published, and the earliest we could see it impact our businesses would be Fall, but it’s good to know what may be coming and get ready. 

Short version… The ruling is designed to restrict the enforceability of non-compete clauses in employment contracts. Why? To curb the perceived power imbalance between employers and employees, and to enhance labor mobility if people aren’t happy where they are and want to leave. An important note- these laws vary by jurisdiction, but non-compete agreements would be limited to high-earning employees or specific circumstances such as the sale of a business or dissolution of a partnership.

Potential Impacts on Franchisors

For franchisors, the ruling could reshape how they protect their business models and proprietary information, which are crucial to their competitive advantage:

1. Protection of Trade Secrets: Franchisors will need to strengthen other legal instruments like confidentiality agreements and non-disclosure agreements to safeguard their trade secrets effectively.
2. Restructuring Franchise Agreements: Adjustments in franchise agreements may be necessary to comply with the new legal standards, focusing more on non-solicitation clauses and other restrictive covenants that are still permissible under the new laws.
3. Increased Focus on Training and Support: To support franchisees in keeping key employees, franchisors might invest more in training, support, and other incentives that become tools their franchisees have access to that enhance satisfaction and loyalty, beyond contractual obligations.

Potential Impacts on Franchisees

Franchisees, the employer of all the people on the teams they use to run their business, face their own set of challenges and opportunities under the new ruling:

1. Recruitment and Retention: The inability to enforce non-compete agreements with employees could lead to increased risks of business information leakage or employees leaving to start competing businesses.
2. Operational Jackpot: On the flip side, the easing of non-compete restrictions can aid franchisees in attracting top talent who may have otherwise been deterred by stringent non-compete clauses to help them manage teams and grow.
3. Franchisor/Franchisee Support and Expectations: Franchisees may find tools and data shared from the network and provided by franchisors can help them focus more on the culture of their organizations and elevate key players in their organizations. 

Next Steps

Both franchisors and franchisees need to proactively address the challenges posed by the 2024 employee non-compete changes. Culture is even MORE critical as it’s now easier for people to leave and work for your competition. 

Here are some recommendations for franchisors to stay competitive in how they support their network through these changes: 

1. Consult with legal experts who specialize in franchise law to ensure all contracts and agreements are in line with the latest regulations and still protect business interests. We suggest starting with those that are supplier members of the International Franchise Association
2. Emphasize creating a positive work environment and company culture that naturally retains employees, reducing the need to rely solely on legal restrictions. 
3. Offer tools to help franchisees attract and hire strong managers and leaders for their organizations, and understand how that can help them grow and be more successful. 
4. Survey employees in your network to monitor manager performance and culture. FBR assists franchisors with customizing surveys they can offer franchisees to gather data from their teams and benchmark it against others within the brand to identify opportunities for franchisees to coach underperforming managers. 
5. Send your operations and HR teams to the FBR Summit this fall to gain practical knowledge of how to best help franchisees navigate this with their employees. Franchise performance expert Scott Greenberg will give a keynote focused on hourly employees, and three franchise legal beasts will be there answer questions as well.
6. Stay informed about further legal changes and public policy trends related to employment and franchise law to remain compliant and competitive. You could start with the IFA’s Legal Symposium happening next week. 

The 2024 employee non-compete changes require careful attention from both franchisors and franchisees. By understanding these potential changes, and focusing on culture within each (corporate and franchisee) organization, we can protect our businesses and the brand.