FTC’S Ban on Non-Compete Agreements: The Impact on Employers

 

In a groundbreaking move last week, the Federal Trade Commission (FTC) issued a ruling affecting non-compete agreements, sparking the possibility of a significant shift in the landscape of labor rights and mobility for workers nationwide. While the decision grew from concern about the negative impact on employees’ ability to be mobile, there are unintended consequences. 

What is the FTC’s ruling?

While non-compete agreements were traditionally used by employers to protect their businesses from departing employees, the FTC, in their Non-Compete Clause Rule (“Final Rule”), banned the ability of employers to require that employees sign agreements containing non-compete clauses as a term or condition of their employment. It voids those that currently exist, and it prohibits employers and employees from entering into non-compete agreements in the future.  

Finding non-compete clauses to be among unfair methods of competition in violation of Section 5 of the FTC Act, the FTC announced, in its press release, that it believes this ban “will generate over 8,500 new businesses each year, raise worker wages, lower health care costs, and boost innovation.” 

However, the new ban leaves an important exclusion for highly trusted employees.  For them, non-competes are very much still in play.

What does this mean for employers?

Typically, the non-compete, used in conjunction with non-solicitation agreements, were designed with the precise goal of protecting the employer’s customer lists and other trade secrets. The FTC’s ban on non-compete agreements removes, in part, one of the tools employers used in an effort to protect their business interests; but that tool was perhaps the bluntest of instruments.

What remains available to employers, in spite of the ban, is actually the most effective tool for protecting business assets. That is the non-solicitation covenant coupled with an agreement to keep confidential trade secrets such as customer lists, pricing schedules and the like. To learn more about an employer’s ability to protect its assets through other means, see a recent article published on our website, “Protecting Your Business From Your Employees.” 

What is a non-compete clause?

A non-compete clause is a term or condition of employment that prohibits an employee from working for a competitor or setting up a competitive business after their employment ends. This clause is now prohibited under the FTC Final Rule. Although this prohibition applies for most employees, the FTC carved out an exception for senior executives as defined in the Rule. 

Who are the senior executives not affected by this Final Rule?

Existing non-competes remain in place for “senior executives,” defined as employees who are in a “policy-making position” and who earn a total of at least $151,164.

A policy-making position is a business entity’s president, chief executive officer or the equivalent, or “any other officer of a business entity who has policy-making authority.” The rule defines policy-making authority as the “final authority to make policy decisions that control significant aspects of a business entity or common enterprise.” 

This means that if an employer has a senior executive who earns more than $151,164 per year and has authority to control significant aspects of the business, the employer can subject that employee to a non-compete agreement under the FTC Rule.

In the District of Columbia metropolitan area, it is not uncommon for senior executives to earn over $152,000 per year, and the employment agreement could certainly include “policy-making” decisions critical to the business as part of the job description.  

When will the Final Rule take effect?

The Final Rule is scheduled to take effect 120 days after it is published in the Federal Register.  But this effective date is not certain, as there is already at least one court action filed seeking to challenge the FTC’s rule making authority over employment issues that are typically regulated by the states. On April 24, 2024, the day after the Final Rule was issued, the U.S. Chamber of Commerce filed a lawsuit against the FTC in the U.S. District Court for the District of Texas seeking to set aside the Rule as outside of the FTC’s scope of authority.

What actions should employers take now?

While the ruling is being challenged in the courts, with a final decision unlikely any time soon, employers should take the following steps:

(1) take inventory of their current employment agreements, and, if they cover workers who are not “senior executives,” prepare and deliver the required notice of unenforceability;

(2) review all form employment agreements, employee handbooks or other company resource documents that may contain non-compete clauses or any other language stating or implying that an employee may be restricted from seeking or accepting work in the U.S. or from operating a business in the U.S. at the conclusion of the worker’s employment and, as necessary, revise any documents to remove the prohibited language; and 

(3) schedule a detailed strategy session with your counsel experienced in drafting and enforcing these types of post-employment agreements to better plan for the future protection of business assets.   

We will be monitoring this issue, and we will provide updates in future Ahead of the Curve articles. We highly recommend that you schedule a consultation with your trusted counsel as soon as possible. If you would like to consult with one of our attorneys, you can reach out to Jennifer Blunt at (301) 634-3157 (jblunt@sgrwlaw.com); Eric Ciazza at (301) 634-3149 (eciazza@sgrwlaw.com); or Gene Policastri at (301) 634-3190 (gpolicastri@sgrwlaw.com).