On Tuesday, April 23rd, 2024, the Federal Trade Commission (FTC) announced a nationwide ban on non-compete agreements. This ban will go in to effect 120 days following publication of the rule in the Federal Register. As with any regulatory change, understanding the nuances is crucial for both employers and employees to navigate this new landscape effectively.
Let’s start by learning why it’s crucial for both employers and employees to understand the implications of this ban. Non-compete agreements are contracts that prohibit employees from engaging in competition with their former employers, such as working for a competitor or establishing a rival business, typically within specified timeframes and geographic areas. Employers often utilize these clauses to safeguard their confidential information and what employer’s claim are trade secrets.
Currently, upwards of 30 million individuals are contractually bound by non-compete agreements in their workplaces. For many, signing the dotted line on such agreements restricts their access to improved job prospects or the ability to launch their own ventures. Originally, non-compete agreements were reserved for executive-level staff, but in recent years, their usage has extended to encompass lower-skilled and even lower-wage employees.
While these agreements can help employers in preserving proprietary information, information about customers, and other confidential employer information, they can also serve as barriers for employees seeking better-paying positions or better opportunities for career advancement.
Here is a breakdown of the key points to know about the recent FTC ban provided by Harold Goldner, chair of the employment law department at Friedman Schuman:
- What the Rule Does: The rule distinguishes between “senior executives” and “workers other than senior executives.” Senior executives are defined as being in a policy-making position and earns at least $151,164 annualized. Workers other than senior executives are everyone else.
- For senior executives, the rule prohibits the entering into or enforcement of a non-compete after the effective date of the rule, unless the non-compete was entered into before the effective date.
- For workers other than senior executives, the rule prohibits the entering into or enforcement of any non-compete clause including existing non-compete clauses.
- Exclusion of Business Sales: The Rule expressly does not pertain to the sales of businesses. This distinction is vital for businesses engaging in mergers, acquisitions, or similar transactions.
- Non-Solicitation Clauses Remain Intact: The ban does not affect non-solicitation clauses, which prohibit employees from soliciting customers or clients from their former employer. These clauses serve to protect businesses from unfair competition.
- No Impact on Non-Disclosure Clauses or Trade Secrets Laws: Importantly, the ban on non-compete agreements does not supersede non-disclosure clauses or any federal or state trade secrets laws. Additionally, it does not affect the doctrine of inevitable disclosure, which restricts executives from moving to competing employers.
- Potential Court Challenges: There is a serious question regarding the FTC’s authority to regulate in this space, or its ability to preempt state laws in the area. Secondly, the rule affects existing contracts (to the extent it relates to senior executives) and that could be deemed an unconstitutional impairment of existing contracts. Finally, the distinction between senior executives and other workers may not be justified. Court challenges are not only likely but have already begun. Such court action could result in a stay of the enforcement of this rule.
- U.S. Supreme Court’s Role: The regulation may invite scrutiny from the Supreme Court, particularly in light of ongoing debates surrounding the Chevron Doctrine, which dictates deference to administrative agencies.
- There are better options available to Employees: For rank-and-file employees, non-compete agreements have long been viewed unfavorably. Crafting agreements focused on non-solicitation and non-disclosure can provide better protection for both employers and employees. Pure non-compete agreements are generally not favored by courts for low-level employees. A recent outbreak of non-competes for fast food workers was quickly quashed by judicial and even legislative action.
- Formal Notice Provisions: Employers should be aware of formal notice provisions in the regulation and ensure compliance with updated requirements. The notice advises all employees except senior executives that they are no longer subject to any non-compete entered into before the effective date of the Rule.
- What about existing settlement agreements? The Rule offers no guidance on whether a settlement agreement between an employee and former employer which contained a non-compete agreement is now void. The Rule defines “worker” as including former workers.
- Best practices. The best practice is for any employer reliant upon non-compete agreements with its employees to protect its proprietary information to confer with employment counsel to determine whether a better approach that does not violate this Rule is available.
The FTC’s ban on non-compete agreements marks a significant shift in employment practices. Understanding its implications and navigating associated challenges requires careful consideration for all employers and given the complexity of the regulation, it’s advisable for employers to seek guidance from legal counsel to ensure compliance and mitigate risks. If you’re an employer or business owner with concerns about the implications of the recent FTC ban on non-compete clauses, don’t hesitate to reach out to Friedman Schuman attorneys for expert guidance and assistance. Our experienced legal team can help navigate the complexities of this regulatory change and ensure that your business interests are protected. Contact us today to discuss your concerns and explore your options moving forward.
