New federal rule may impact employment contracts

…the FTC received over 26,000 public comments, both against and in favor.

Across the United States and in a wide variety of industries, it is common to find businesses that utilize non-compete agreements in their employment contracts. In fact, it is estimated that roughly one in five workers in the U.S. are subject to such restrictions.

For those that are unfamiliar, the purpose of a non-compete is to prevent a current employee from working for, or starting, a company that is in direct competition with the company they are currently, or previously, employed by. They are enforced typically with a time, and occasionally geographical, restriction in place to prevent employees from leaving a company and immediately taking with them intellectual property, trade secrets and client lists. They can also be used to protect time and financial investment employers make in their employees. Non-compete agreements are typically used for executives and specialty trained professionals such as engineers and medical professionals, and occasionally on entry or mid-level employees.

In January of 2023, the Federal Trade Commission (FTC) announced a proposed rule that would effectively ban nearly all non-compete agreements moving forward. The rule would also nullify any existing contracts that contain a clause that limits an employee’s ability to compete in the job market. The FTC cites in their proposed rule that non-compete agreements are being overused and are not simply being applied to executive and specialty level employees, but all employees.

On April 23^rd, 2024, the FTC announced the issuance of their final rule, which effectively bans future non-competes and voids most current ones. The FTC states, “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned.”

In the 15 months between the initial announcement of the proposed ban and repeal of non-compete agreements and the issuance of the final rule, the FTC received over 26,000 public comments, both against and in favor.

Supporters embrace the FTC’s position of broader freedom for individual workers. They argue this rule creates greater economic opportunity by empowering workers to start new businesses, even if they might compete with a former employer.

Opponents say non-competes are private agreements and the government should not get involved. As of the date this article was written, three organizations, the U.S. Chamber of Commerce, the Business Roundtable, and the Longview Chamber of Commerce in Longview, Texas, have all filed suits against the FTC’s final rule banning non-compete agreements. The U.S. Chamber cites that “in its view, the agency exceeded its administrative authority by outlawing what it deems “unfair methods of competition.” The plaintiff argues that without a clear legislative mandate from Congress, the FTC does not have the power to issue and enforce their blanket non-compete ban.

What does all of this mean for your business? The FTC’s rule will apply to any new employment agreement, meaning that no newly hired employee, no matter their title or compensation, may be restricted by a non-compete agreement in their employment contract. The ruling also will nullify and void a non-compete agreement clause in almost all existing employment contracts today, however this does not void the entire employment contract according to the FTC. The only exception to the retroactive nature of the ruling is for “senior executives”, who’s non-competes may stay in place for the duration of the current contract. The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions.

The non-compete repeal and ban is scheduled to go into effect 120 days after the final rule was published, making the effective date August 21, 2024. However, with the lawsuits filed against the FTC, this could lead to a delay in implementation of the final rule. The plaintiffs have requested a preliminary injunction, or stay, which would delay the implementation until a court can litigate the case.

The Chamber will continue to follow this issue and keep you informed of any major developments. However, in the meantime, if your company utilizes non-compete agreements you should explore other avenues to protect your business’ assets should the rule be implemented this fall.