Non-compete Agreements

The federal government took an unprecedented step by finalizing a rule that seeks to ban non-compete agreements between nearly all employers and all workers.

If the rule survives legal challenges, employers will be prohibited from entering into most new non-competes and prevented from enforcing existing non-competes in all but a few circumstances, such as against a limited class of senior executives.

Employers will also be required to provide notice to current and former workers that their non-competes are no longer valid.

While the non-compete agreements rule is not slated to take effect until August and is already being challenged in court — which could derail it or kill it altogether — you may not want to wait to start preparing.

The Rule Does 3 Major Things

The rule finalized by the Federal Trade Commission (FTC) on April 23 does three critical things:

  • You will no longer be able to enter into non-compete clauses with workers.
  • You can no longer enforce existing non-compete agreements – unless they cover certain senior executives.
  • You must provide explicit notice to both current and former employees that their non-competes are no longer enforceable.

2 Key Definitions to Explain

What is a Non-Compete?

The rule defines “non-competition agreements” as any term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking or accepting employment with another business or operating a business.

The FTC’s rule does not explicitly ban other forms of protection for employers, such as:  customer non-solicitation agreements, employee non-recruitment, confidentiality, or non-disclosure provisions. Rather, the FTC said those provisions are still valid  if they do not prevent someone from getting a job, but the determination will be made on a case-by-case basis.

Who Are Senior Executives?

The final rule defines “senior executives” as workers earning more than $151,164 annually and who are in policy-making positions. You are allowed to maintain and enforce existing non-compete agreements with these higher-level workers. FTC estimates “senior executives” make up fewer than 0.75% of all workers.

The FTC’s Concessions

The FTC did reduce the scope of its original proposed rule in two meaningful ways:

  • No need to rescind. You do not need to take active steps to formally rescind existing non-competes.  While the initial proposal required modification of all existing agreements, the agency determined that would have been too large of an administrative burden for employers.
  • Business sale exemption expanded. The final rule also allows for non-competes during the bona fide sale of a business or the sale of someone’s ownership interest.   

More Info on Notice Requirement

Before the effective date, you must provide notice to workers that their non-compete clause is no longer in effect and, unless they are senior executives, may not be enforced against them.

Such notices must follow several guidelines:

  • You must provide “clear and conspicuous” notice that identifies the person who entered into the non-compete with the worker.
  • You have to provide it in digital format (such as email or text) or on paper. Oral notice does not count.
  • The worker is exempt from the notice requirement if you have “no record” of a street address, email address, or mobile telephone number.

You must provide this notice to both current and former workers (at least to those former workers who are potentially subject to active non-compete clauses as of the rule’s compliance date).

The rule also includes model notice language and creates a safe harbor for employers that use the model notice. You do not have to use this language to comply with the law as long as you use language that effectively communicates the requirements above. It is currently uncertain whether you will gain the safe harbor’s protections if you veer from the model notice. 

What Are The Next Steps?

  • The earliest we can see the rule taking effect would be August 22, 2024.
  • Court battles already underway.  Business advocacy groups are taking aim at the rule and the feds are working furiously to preserve it.
  • Long road ahead.  It would also not be surprising to see a federal appeals court being called on to issue a sweeping ruling on the matter. This issue is of such importance that Supreme Court intervention is also a distinct possibility. Appeals take time, so don’t be surprised if this battle drags on into 2025 and beyond. Additionally, the FTC’s direction would likely change if there were a change in control of the White House.

Your 5-Step Plan

You can’t count on the courts blocking the rule and releasing you from obligations. However, it might not make sense to invest time and resources in compliance only to see the rule struck down and your efforts wasted.  If you have non-compete agreements and want to strike the right balance, CLICK HERE for five steps to consider.

1. Develop a Personalized Strategy Plan

Work with your legal counsel as soon as possible to craft an individualized strategy plan in light of these developments. Take into consideration the size of your business, number of non-competes in play, importance of such agreements to your business, your risk tolerance levels, and resources you have on hand.

2. Use the Next Few Months to Take Stock

Even if you have a high risk tolerance and feel confident that the rule will be blocked by court action, you might not want to do nothing between now and the summer.

  • Between now and the Fourth of July, even the most risk tolerant employers may want to take an inventory of all existing restrictive covenant agreements – including those that bind former workers. This is often a good use of time and money even without the looming FTC rule.
  • Make sure you determine which workers fall under the “senior executive” category to allow for enforcement.
  • At the same time, make sure you are tracking all new non-competes you put into effect from here on out.

3. Begin Plotting Alternatives

Start strategizing about whether your organization can protect your interests with a less burdensome covenant. A properly tailored customer non-solicitation or confidentiality provision could achieve the same goals with less risk involved.

4. Don’t Ignore Other Restrictive Covenants

Speaking of other restrictive covenants, remember that the final version of the rule does not specifically render them unenforceable. Make sure to review your non-solicitation, non-recruitment, non-servicing, and non-disclosure clauses, knowing they may soon be subjected to scrutiny.

5. Get Your Trade Secrets House in Order

This is perhaps more important now than ever. The FTC cites the availability of trade secret protection as a factor that could mitigate the harm of abrogating non-competes. You should identify your trade secrets and ensure that you have proper policies and procedures in place to protect them. Limit trade secret access only to those who need it. Train employees how to handle trade secrets and protect against theft. Implement suitable technological controls. In short, think through what your answer would be under oath to the question “tell me everything you have done to prevent your trade secrets from falling in the hands of a competitor.”

Read more about some FAQs on the FTC’s Non-compete agreement ban. Click Here.

Don’t know where to start? Talk to the Kismet team today!

Interested? To learn more about how Kismet PEO can help you, click below!

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