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Key Upcoming Changes to Non-Compete Laws: What Steps Should Employers with US Employees Take?
As we shared in the first entry to this blog series, in April 2024, two United States agencies with authority to regulate employment and competition announced major changes to how most employers must operate in the US. If you missed part one on the Department of Labor Salary level changes, you can read it here - Key Upcoming Changes to DOL Salary Level Increase. In part two of this blog, we discuss the US Federal Trade Administration’s (FTC) recently announced rule banning all non-compete agreements with workers, subject to few narrow exceptions.
FTC Non-Compete Ban – Anticipated to be Effective 4 September 2024
In late April, the FTC published a sweeping and unprecedented ban on the use of any agreement which “prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” seeking or accepting work with a different person or operating a business in the US following termination of employment. “Worker” is defined broadly to include anyone who worked – whether paid or unpaid – for the employer, including employees, independent contractors, interns, volunteers, apprentices, or sole proprietors. If this rule becomes effective as scheduled on 4 September 2024, it will be unlawful to enter into or attempt to enter into, enforce or attempt to enforce, or represent that a worker is subject to a prohibited non-compete agreement in the US.
There are a few exceptions to this sweeping ban, including allowing for non-compete agreements related to the sale of a business and permitting existing non-competes with senior executives while prohibiting any new competes with senior executives. In addition, it will still be lawful to enter into and enforce non-disclosure agreements (NDA) and agreements prohibiting solicitation of employees and customers. However, the broad language of the FTC rule suggests that NDAs or non-solicitation agreements that “functionally prevent” employment with competitors – for example in certain industries in which the business community is small and overlapping – might run afoul of the rule. What should businesses with US employees do next?
- Monitor Enforcement: on the same day the FTC published the rule, business groups filed lawsuits seeking to delay or bar enforcement arguing that the FTC lacks the authority to pass such a sweeping rule. Although it is impossible to predict the outcome of these cases, there is a solid chance enforcement will be delayed. Because of this uncertainty, employers should plan for, but not yet implement, anticipated changes.
- Consider Entering into or Adjusting Non-Competes with Senior Executives: one of the limited, but fleeting, exceptions to this new rule is for senior executives, defined as a worker with “final authority to make policy decisions that control significant aspects of a business” and who makes at least $151,164 in annual salary. Although entering into new non-competes with senior executives will become unlawful after the rule goes into effect, any non-competes with senior executives that already exist as of the effective date can remain in force. As such, employers should review their arrangements with existing senior executives and should strongly consider entering into agreements now, while they are still lawful.
- Survey Existing Non-Competes with Workers: if the rule goes into effect, employers who currently have non-compete agreements with workers must notify each of those workers in writing that the employer will not enforce the non-compete clause. The FTC has provided a sample notice employers may, but are not required, to use. Because enforcement is uncertain, we recommend that employers do not yet notify employees of the anticipated change. Rather, employers can prepare for the notice by compiling comprehensive lists of each worker, including former and current employees and consultants, with a non-compete agreement so that employers are ready to issue notice if required.
- Consider How Else to Protect the Company’s Confidential Information and Business Opportunities: if the rule goes into effect, employers who wish to limit competition should be prepared with NDAs and non-solicitation agreements but should take care not to overreach on the scope of those agreements. In addition, companies can consider requiring a period of Garden Leave following notice of termination of employment which would effectively prevent competition during the Garden Leave. Although Garden Leave provisions remain uncommon in the US and are largely untested by courts, they are likely permissible under the FTC rule provided the employee receives full pay.
- Abide by State Laws: if the FTC rule is overturned, state laws governing enforceability of non-compete agreements will remain paramount. For example, California already prohibits non-compete agreements and will continue to do so even if the FTC rule is overturned. Other states impose differing restrictions, such as the requirement of additional pay in exchange for the non-compete or an opportunity to consult with a lawyer. Employers should understand the laws of each state in which employees work.
The FTC rule represents a sea change in employment law in the US and, if it goes into effect, employers who have previously relied on non-competes must find alternate ways to protect the business. MBM Commercial’s US Team will monitor the enforcement timeline and can assist employers navigating this significant change.
