On April 23, 2024, the Federal Trade Commission issued a ban on the use of non-compete agreements between employers and workers, which is already being challenged in federal court. If the courts agree to enjoin the new rule (which they likely will), it will be temporarily stayed while litigation commences. But have no fear, even if the “Final Rule” (“Rule”) is found to be enforceable, the requirements for employers are workable and there are alternatives to the benefits of non-compete.
The Rule provides that “it is an unfair method of competition—and therefore a violation of Section 5 [of the Federal Trade Commission Act]—for employers to . . . enter into non-compete clauses with workers on or after the final rule’s effective date.” That effective date will take place 120 days after the Rule’s publication in the Federal Register. The purported reasoning behind the ban, according to the FTC, is that non-compete clauses tend to prevent workers from taking new jobs or starting businesses for a specified period of time after leaving an employer, which often thwarts competition for labor and results in lower pay and benefits for workers.
The Rule maintains that existing non-compete agreements with senior executives will remain enforceable and defines a “Senior Executive” as a worker who is in a “policy-making position,” and whose annual compensation is at least $151,164. However, employers would be prohibited from executing or enforcing new non-compete agreements with any workers, including senior executives.
There are some exceptions to the ban, including for buyers and sellers engaged in the sale of a business entity. The Rule provides that so long as a non-compete is entered into pursuant to a good faith, bona fide sale of the business entity, non-compete provisions are permissible. There is also an exception for causes of action related to non-compete clauses that were accrued prior to the effective date of the Rule.
Many business groups are already attempting to stop the FTC in its efforts to issue the ban. On Wednesday, April 24, 2024, the U.S. Chamber of Commerce (“USCC”) filed suit in federal court in Texas asserting that because the states have historically had exclusive authority to regulate non-compete agreements and Congress never authorized the FTC to step in and take that authority from the states, the FTC has overstepped its authority in issuing the Final Rule.
So, what happens if the Rule is held to be enforceable? It will be quite a mess for both employers and employees. Section 910.2(b)(1) of the Rule states that for any existing non-compete agreement (that does not involve a senior executive), “the person who entered into the non-compete with the worker must provide clear and conspicuous notice to the worker by the effective date that the worker’s non-compete will not be, and cannot legally be, enforced against the worker.” The Rule will be applied retroactively, meaning employers will be required to provide notice to current workers, as well as workers who were formerly employed by the employer. If employees were paid more in order to enforce a non-compete restriction, it may result in lower salaries/payments to employees, not more, as the FTC claims.
In the event the Rule is enforced, there are several alternatives that allow employers to protect their businesses in the absence of non-compete agreements, including the use of trade secret laws, as well as confidentiality, non-solicitation and non-disclosure agreements .
That said, as with other recent attempts at government agency rulemaking, we predict that the courts will elect to enjoin the Rule, and ultimately, deem it unenforceable. If this does not occur, please feel free to reach out to our office for assistance in drafting new agreements and issuing the required notice to current and former workers in your business.
Contact our Labor & Employment Attorneys Seth P. Briskin, Lester W. Armstrong, David M. Smith, Steven P. Dlott, Joseph C. Pokorny, R. Mark Gottfried, Kathleen M. Minahan or Amily A. Imbrogno at 216-831-0042 for more information.