The federal government made a groundbreaking move by finalizing a rule aimed at eliminating non-compete agreements for virtually all workers and employers. Should this rule withstand judicial scrutiny, your ability to forge new non-competes will be significantly curtailed. You’ll also find yourself unable to enforce most existing non-competes, with only a narrow exception for a specific group of high-ranking executives. You’ll need to notify both current and past employees that their non-compete clauses are now void.
The Rule’s Core Provisions:
- New non-compete agreements with employees are off the table.
- Enforcing existing non-compete clauses is largely prohibited, save for certain high-level executives.
- A mandate to inform both present and past employees that their non-competes are unenforceable.
Clarifications on Key Terms
Non-Compete: The rule interprets non-competes broadly, covering any employment terms that restrict or discourage a worker from seeking or accepting employment elsewhere, or starting a business. The FTC does not extend this ban to other employer protections like non-solicitation, confidentiality, or non-disclosure agreements, provided they don’t impede an individual’s employment opportunities.
Senior Executives: These are defined as employees earning over $151,164 annually, holding policy-influential roles. While you’re permitted to uphold non-competes with these elite employees, they represent less than 0.75% of the workforce.
FTC Rule Changes on Non-Competes
The FTC has made two significant adjustments in response to extensive feedback:
No Formal Rescission Required: Employers are no longer mandated to formally annul existing non-compete agreements. This move reduces the administrative load initially proposed in January 2023, which would have obliged employers to amend all existing contracts.
Expanded Exemption for Business Sales: The revised rule permits non-competes in genuine business sales or when selling an ownership interest. This is an expansion from the original draft, which restricted exemptions to situations where the seller held at least a 25% stake in the business being sold.
The Notice Requirement
Prior to the rule’s activation, employers must inform workers that their non-compete clauses are invalidated and unenforceable, except for senior executives. Key points include:
- Notices must be “clear and conspicuous,” identifying the agreement holder.
- They can be delivered digitally (via email or text) or on paper, but oral notices are insufficient.
- Workers without a recorded address, email, or phone number are exempt from receiving notices.
- Both current and past employees potentially under non-compete restrictions must be notified.
- While using the FTC’s model notice language offers a safe harbor, alternative effective communication is permitted. However, deviation from the model may affect safe harbor eligibility.
Looking Forward
- Implementation Date: The rule will enter into effect 120 days after its publication in the Federal Register, targeting an August 22, 2024, start date.
- Legal Challenges: Immediate legal opposition is anticipated, with entities like the U.S. Chamber of Commerce already vowing to contest the rule. A flurry of court actions, potentially extending to the Supreme Court, is expected.
- A Protracted Battle: Given the appeals process and the possibility of a political shift influencing the FTC’s stance, this issue may extend well into 2025 or beyond.
Your Action Plan
1. Craft a Tailored Strategy
Immediate collaboration with your HR advisor is crucial to formulate a strategy that reflects your business size, the prevalence of non-competes within your organization, their significance, your risk appetite, and available resources. This personalized plan will guide your next steps.
2. Conduct a Thorough Review
Regardless of your optimism about the rule being overturned, use the upcoming months to audit all existing restrictive covenants, including those involving former employees. Identifying which of your employees qualify as “senior executives” is essential for enforcing any non-competes. Also, keep a record of any new non-competes established during this period.
3. Explore Less Restrictive Alternatives
Engage with your leadership to consider whether alternative agreements, such as non-solicitation or confidentiality clauses, could safeguard your interests with lower risk.
4. Reevaluate Other Agreements
Despite the focus on non-competes, other types of restrictive covenants remain unaffected by the FTC rule but may face increased scrutiny. Review your non-solicitation, non-recruitment, non-servicing, and confidentiality agreements, adjusting them as needed to defend your legitimate business interests.
5. Secure Your Trade Secrets
With trade secret protection highlighted by the FTC as a key consideration, it’s critical to identify your trade secrets and enhance policies and procedures for their protection. Limit access to essential personnel, provide thorough training on handling sensitive information, and implement strong technological safeguards. Be prepared to demonstrate comprehensive protection efforts if questioned.
As with the other major news recently regarding the salary test increase for workers to receive overtime pay, you cannot count on the courts to get in the way of this rule taking effect. You must take action now to ensure compliance.
Stay Compliant With Federal Employment Rules
If you are looking for assistance navigating these federal changes, consider hiring me as an HR Consultant. My strong legal background and HR expertise can help you stay compliant.
Contact me to get started.
