Non-Competes Now “Non-Legal”
Update: As of August 20th, 2024, this ruling has been temporary struck down by a Federal court. For the time being, there is no need to comply with the original ruling. We encourage to you check back or follow us for updates.
In one of the most “prolific” weeks in a long time when it comes to governing bodies and their activity in the employment space, it wasn’t just the Federal DOL and NYS who enacted new restrictions and requirements for businesses. The FTC joined the fun as well, passing sweeping reform to the legality of Non-Compete (and similar) agreements and enforcements- now unilaterally making them illegal. What does this mean for employers who currently have policies and agreements in place? What about the ability to protect confidential and proprietary information into the future? We break down what we know here, including required action that should take place ASAP.
The FTC defines “Non-compete clauses” in reference to this new restriction as “all clauses that prohibit a worker from, penalize a worker for, or functions to (i) prevent a worker from seeking or accepting work in the US with a different person where such work would begin after the conclusion of their employment; or (ii) operating a business in the US after the conclusion of their employment”.
Specifically, this FTC ruling now declares it is an “unfair method of competition” for a person to:
Enter into or attempt to enter into a non-compete clause.
Enforce or attempt to enforce a non-compete clause.
Represent that a worker is subject to a non-compete clause.
As a result, employers should review any clauses in contracts, policies (handbook or separate), or other documents that make requirements or threats to employees related to competition. These mentions should be modified or more likely eliminated as part of this new ruling.
This ban generally applies to all employees, with only three potential exceptions (as it appears now):
Employers seemingly can restrict competing activity during the term of a person’s employment with them. This includes entering into and enforcing non-competes during this period. The agreements can just not restrict, or make mention of restricting behavior beyond this time.
The ban does not apply to a non-compete clause entered into by a person through a bona fide sale of a business, of that person’s ownership interest in a business, or of all or substantially all of a business entity’s operating assets.
The ban does not apply to non-compete agreements with “Senior Executives” in existence prior to the effective date of the ban. “Senior Executives” are workers in a “Policy-Making Position,” i.e., a CEO or other high-ranking employees with final authority to make policy decisions controlling significant aspects of a business. They also must make at least $151,164.00 annually to be considered a Senior Executive.
Other final elements of note for employers as they plan to comply with this new ban:
The ban applies to all non-compete clauses in policies, contracts, etc. already in existence and into the future.
As a result of this ban, employers are required to clearly and conspicuously notify every employee who is subject to a non-compete clause that the non-compete clause will not be, and cannot legally be, enforced against the employee. The final rule contains model language for this notice. This is required within 120 days after the final rule is published to the Federal Register, but employers should make plans to do this now.
Although not mentioned specifically here, other non-solicitation, non-disclosure, severance agreements, and other similarly restrictive agreements may threaten to violate this ban- especially if they are too broad in scope. Employers should review these documents with legal counsel to ensure compliance- keeping what they can, but eliminating what they should to avoid trouble, especially if these documents make requirements of employees after their employment ends.
