On April 23, 2024, the Federal Trade Commission (FTC) banned companies from using non-competition agreements – generally referred to as “noncompetes” in employment agreements, severance agreements, and other contracts. The purpose of noncompetes is to protect employers from being competitively disadvantaged by companies that hire their employees away from them and then benefit from that former employee’s inside knowledge of the company, which theoretically provides an unfair advantage to the hiring company.
The FTC issued the final rule on April 23, 2024, which states that noncompetes violate Section 5 of the Federal Trade Act and create unfair methods of competition. The noncompete ban goes into effect on September 4, 2024. On that day, noncompetes can no longer be used in most circumstances and nearly all existing noncompetes will be unenforceable. Historically, noncompetes and similar agreements are interpreted by a state authority, either by the courts interpreting the common law or, occasionally by a governmental regulatory body. With the FTC now stepping in, the federal regulation usurps the state regulation except when the state law is more restrictive than the FTC ban.
Traditionally, noncompetes are used to prevent current or former employees from working for or with their employer’s direct competitors. After leaving a company, noncompetes can prohibit employment with these competitors for a reasonable period, which can extend for months, and occasionally years. In addition, the noncompetes were limited in scope to the geographic area where the employer is located. Noncompetes also prevent former employees from opening their own competing businesses.
The noncompete ban is far-reaching because the FTC has extended the ban to include “workers,” and not just employees. The FTC has defined a “worker” as “an employee, independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a person.”
As a result of the FTC’s action, existing noncompetes will not be enforceable and companies are required to notify their employees working under a noncompete that these agreements are unenforceable and will no longer bind them. The FTC has provided model language for these notifications.
However, the FTC rule does not apply to all employees. Senior executives with existing noncompetes have been carved out of the ban so those agreements will continue to be enforceable, although new noncompetes for senior executives will be prohibited.
Under the new final rule, the senior executives that may still be covered by a noncompete are defined as employees who:
- Earn $151,164 or more annually; and
- Are in a policy-making position, which means they are a president and/or chief executive officer, or in an equivalent position; or are a person in the company who has policy-making authority like these executives.
- “Policy-making authority” is defined as the ability to make decisions that control significant aspects of a business entity or common enterprise. It does not cover those people who can influence policymaking but lack decision-making power. For instance, a vice president who provides the input to executives for important decisions, but who is not empowered to make those decisions on their own.
The FTC provided an example of executives that seem to fall under the “Senior Executive” category but are not considered senior executives under the rule and therefore cannot be bound by a noncompete. For instance, in situations involving a separately incorporated subsidiary, such as a printing company that is owned by a parent company. In those situations, an executive with policymaking authority over only their subsidiary company, but without policymaking authority over the entire common enterprise of the parent company, would not be considered a senior executive who could be bound by a noncompete.
The ban on noncompetes also is far-reaching because the final rule is broadly worded and can capture other types of restrictive clauses and agreements in the ban. For instance, “non-solicitation” agreements (known as “nonsolicits”) are often used in employment agreements with executives and salespeople. These nonsolicits generally prevent former and current employees from soliciting business from a company’s current customers for an entity other than the company. Although, those customers may switch their business to the different entity anyway, with or without solicitation, unless they are bound by a contract of their own. Nonsolicits are currently accepted in most states but some states, such as Washington, already interpret nonsolicits as noncompetes. Time will tell if the federal ban does the same.
Companies may use an alternative to noncompetes through specifically drawn non-disclosure agreements (NDAs) that protect trade secrets and other sensitive information. Often, noncompetes were part of agreements that also contained NDAs. Now the NDAs would need to function separately from the noncompete clauses. To not fall under the ban, the NDAs will need to be written in a manner that although they prevent the dissemination of sensitive information and trade secrets, they cannot be so restrictive that they prevent workers from seeking or accepting work somewhere else, or from starting their own businesses.
Other contractual provisions may be impacted by the FTC ban, such as requiring employees to repay employers for training. For example, if a training repayment agreement restricts an employee from seeking other employment for a prolonged period of time, that repayment agreement might fall under the noncompete ban.
While there are many restrictive clauses that may fall under the ban, some types of employment agreements appear to be allowed. These include the following:
- Separation agreements that do not involve post-employment restrictions,
- Standard employment contracts for a specific duration,
- Retention agreements that accompany a signing bonus – although the retention term should be reasonable,
- No moonlighting provisions – although those might be banned if they are overly broad, and some states may prohibit moonlighting agreements.
Even though noncompetes are now banned in most circumstances, this does not give employers a green light to hire someone who is currently bound by a noncompete. Instead, have an attorney review the noncompete and assess whether the agreement is among the exceptions to the ban.
In this article Adriane Harrison, VP of Human Relations Consulting, PRINTING United Alliance, addresses the new federal ban on non-competition agreements. More information about labor and employment laws and regulations can be found at the Center for Human Resources Support or reach out to Adriane directly if you have additional questions specific to how these issues may affect your business at: aharrison@printing.org.
To become a member of the Alliance and learn more about how our subject matter experts can assist your company with services and resources such as those mentioned in this article, please contact the Alliance membership team: 888-385-3588 / membership@printing.org.