Employee Non-Compete Agreements Restricted

In the old days, you might see a small business owner requiring a low level employee, even an administrative assistant, sign a non-compete. Those days are thankfully gone as certain states have moved in to balance the equation by banning non-competes and protecting employees.

The Federal Trade Commission (FTC) issued a final rule on April 23, 2024 to ban non-competes nationwide. The Rule was scheduled to go into effect on September 4, 2024 before a federal court placed a temporary hold on the rule.

If the rule eventually is allowed to go into effect, that will mean that entering, attempting to enter, enforcing, or attempting to enforce, and representing that an employee is subject to a non-compete agreement, will be prohibited. And in any event, employers nationwide should consider the rule when preparing employment contracts because there is a national trend narrowing the circumstances under which non-competes are allowed.

Related article: Employers Stop! Non-Compete Agreements Prohibited

Non-competes banned for being anti-competitive

Non-compete agreements impose contractual conditions that prevent workers from taking a new job or starting a new business. Many employers make their employees sign non-competes as a measure to protect the business, not a bad thing, but also to prevent competition, which some states and now the FTC at the federal level find troubling.

The FTC has determined that non-compete agreements are an unfair method of competition and thus has adopted a comprehensive ban on new non-competes with all workers.

According to the FTC, non-competes often force workers to stay in a job they want to leave or face the consequences, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave, or being forced to defend against expensive litigation.

Exclusions from non-competes

Under the new Rule, employers nationwide would not be able to impose non-competes for most workers, with some exceptions. However, non-competes for senior executives would be allowed. Senior executives are those earning over $151,164 in annual compensation and are in a policy making position for the business. The FTC estimates that fewer than 1% of workers are senior executives.

The Rule also does not apply to non-competes entered into by a person pursuant to a sale of a business.

The FTC Rule supersedes all state laws to the extent that a state’s law permits or authorizes conduct prohibited under the Rule or conflicts with the Rule’s notice requirements.

The ban does not specifically target non-disclosure agreements, customer non-solicitation agreements, or employee non-solicitation agreements. However, the Rule makes clear that any of restriction will be banned if it has the same functional effect as non-compete clauses: preventing a worker from seeking or accepting other work or starting a business after their employment ends.

Legal challenges place the Rule on hold

Litigation to invalidate the Rule is already underway. Litigants are arguing that the FTC ban is unconstitutional and are seeking an injunction.

On July 3, 2024, a federal district court judge in Texas granted Plaintiffs’ motion for a preliminary injunction against the FTC’s proposed rule banning non-competes. How likely the challenges will be successful is unknown, but regardless of what happens, the FTC’s Rule reflects a growing disdain for non-compete agreements and many courts may refuse to enforce existing agreements.

Where to go from here

If the lawsuits challenging the Rule succeed, then nothing will change regarding non-competes. Employers would look to state law to determine the extent to which they can impose restrictions on current and former employees.

Assuming the lawsuits challenging the Rule fail, the Rule would go into effect September 4, 2024 or whenever the federal court injunction is lifted.

Notice requirements under the Rule

If you are an employer and have employees who are under non-compete agreements, you are required to provide clear and conspicuous notice to them, in individualized communication, that their non-compete agreement will not be, and cannot legally be, enforced against them.

You must provide notice by the Rule’s effective date by hand delivery, email, text message, or by mail at the employee’s last known street address.

Alternatives to non-competes

Small business owners still have tools to protect their businesses. It is still recognized that you don’t want employees stealing business secrets and running off with them.
You can still rely on non-disclosure agreements, non-solicitation agreements and non-solicitation agreements.

Non-disclosure agreements don’t carry the same negative connotation as non-competes and will likely be enforced by all courts. As such, they are an effective alternative to non-competes to protect your business.

Another effective way to protect your business is a non-solicitation agreement. These agreements are contracts in which an employee agrees not to solicit a company’s clients or customers after leaving the company. This means the employee can’t take your customers away from you. Non-solicitation agreements are also likely to be enforced by the courts. Combined with non-disclosure agreements, non-solicitation agreements make a strong way to protect your business, but you need to make sure that these policies on non-solicitation and confidentiality are crafted to not run afoul of the new Rule.

Conclusion

Even without the new FTC Rule, the ability of employers to impose non-competes on their employees is narrowing throughout the country. The FTC Rule will make the web of restrictions somewhat more consistent. Employers will have to rely on other tools to protect their important interests in their businesses such as confidentiality agreements and non-solicitation agreements.