May 6th Tip of the Week
“Where Have All the Non-Competes Gone?“
On January 12, the Federal Trade Commission issued a proposed rule on Non-Compete Clauses under sections 5 and 6(g) of the Federal Trade Commission Act. Section 5(a) of the FTC Act prohibits unfair methods of competition, while section 6(g) authorizes the Federal Trade Commission to engage in rule making regarding unfair methods of competition. On April 23, 2024, the FTC issued a final rule on this same subject. The final rule defines “non-compete clauses” as
“a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker (1) seeking or accepting work in the United States with a different person where such work would being after the conclusion of employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of employment that includes the term or condition.”
See, https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf, p. 3-4.
In issuing this proposed rule, the Federal Trade Commission has taken the position that Non-Compete Clauses and Non-Compete Agreements harm fair competition and act as a restraint on trade. The FTC also noted that employees who are asked to sign these agreements are often placed in an unfair position and do have equal bargaining power with a prospective employer, because, if they refuse to sign the agreement, they lose out on the employment opportunity. The FTC further noted that state governments and state courts have taken a much more stringent look at non-compete clauses based on a public policy argument and, as a result, many non-compete agreements have been rendered unenforceable. To support its action, the FTC cited numerous examples of employees in a variety of skilled and unskilled occupations who subjected to non-compete agreements and have been restricted in their work and professional opportunities as a result. The FTC also issued this graphic (https://www.ftc.gov/system/files/ftc_gov/images/2024-Noncompete-Infographic-EN-508.png), which indicates that the FTC believes that the effect of the new rule will be more innovation, more new business, and higher earnings for workers.
Under the final rule, which is slated to take effect 120 after it was published on April 23, 2024, non-compete agreements are subject to the following restrictions. For existing non-compete agreements with senior executives (defined as workers who are in a policy making position and earning at least $151,164), entered into before the effective date of the final rule, those agreements will remain in effect and will not be impacted by the new rules. All other existing non-compete agreements with workers who do not meet the senior executive definition will no longer be enforceable. The final rule also does not apply to situations involving non-compete agreements related to a bona fide sale of a business entity, a person’s ownership interest in a business entity, or the sale of all or substantially all of a business entity’s operating assets. The rule also does not impact the continued use of non-disclosure or non-solicitation clauses, meaning that an employer can still restrict a former employee’s use or disclosure of confidential business information or trade secrets and a former employee’s attempt to raid the former employer’s employees.
Going forward, based on this new rule, employers must be careful in how they use non-compete, non-disclosure, and non-solicitation agreements. Unless your new employee falls within the definition of a senior executive, you should not be using a non-compete agreement or a non-compete clause in any employment agreement. Employers should review their non-solicitation and non-disclosure clauses to ensure that their business interests are adequately protected and these clauses do not stray into the area of non-competes. As with many rulemaking activities, this new rule by the FTC will be subject to legal challenges and employers will need to ensure that they are keeping up to date in any developments in this area. myHRcounsel can guide you through the impact of this rule, and other new laws, that affect the employment relationship and ensure that your practices are legally compliant.