NO MORE, NON-COMPETE AGREEMENTS

Steven Cesare, Ph.D.

A business owner from Connecticut called me the other day to talk about various human resources issues like I-9 compliance, developing a legally accurate employee handbook, and employee compensation features. In what is quickly becoming the norm, rather than the exception, intrusive federal legislation is essentially a standard topic for discussion amongst business owners (e.g., new I-9 Form, recent Stericycle decision affecting company policies, and the revised FLSA requirements for exempt employees).

The current regulatory topic comes from the Federal Trade Commission (FTC) which announced a nation-wide ban on employee Non-compete Agreements, with the predicate that their abolition is fundamental to increased employee wages (i.e., average increase of $524 annually), greater innovation (i.e., an average of 17,000 – 29,000 new patents every year), and creating new businesses (i.e., 8,500 start-ups per annum).

To be clear, the FTC defines the “non-compete clause” (i.e., the essence of a Non-compete Agreement) as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.”

According to the FTC, Non-compete Agreements violate Section 3 of the Federal Trade Commission Act as being a widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or creating a new business. Moreover, the FTC believes that Non-compete Agreements often force workers to either stay in a job they want to leave or bear other significant harm and costs, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave the workforce altogether, or being forced to defend against expensive litigation.

This new regulation adopts a comprehensive ban on new Non-compete Agreements with all workers, including senior executives, and independent contractors. For existing Non-compete Agreements, the FTC issued a different approach for senior executives than for other workers. In specific, the FTC has stipulated that existing Non-compete Agreements can remain in place for existing “senior executives.” The FTC defines a “senior executive” as a worker who earns more than $151,164 annually and is in a “policy-making position.” That said, all existing Non-compete Agreements for non-senior executives are unenforceable (i.e., illegal) after the effective date.

In case you were wondering, September 4, 2024, is the anticipated effective date for this new regulation.

Additionally, it is important for business owners to understand that this new regulation:

does not apply to a Non-compete Agreement entered into by a person pursuant to a bona fide sale of a business entity.
does not prohibit employers from enforcing Non-compete Agreements where the cause of action accrued prior to the stated effective date.
that it is not an unfair method of competition to enforce or attempt to enforce a Non-compete Agreement or to make representations about a Non-compete Agreement where a person has a good-faith basis to believe that the final rule is inapplicable.
supersedes all state laws to the extent, and only to the extent, that a state’s laws permit or authorize conduct prohibited under this regulation or conflicts with the requirements of the regulation.
requires an employer to provide clear and conspicuous notice to workers subject to a prohibited Non-compete Agreement, in an individualized communication, that the worker’s Non-compete Agreement will not be, and cannot legally be, enforced against the worker.
the employer must provide that clear and conspicuous notice, by the effective date, to all affected workers by: hand-delivery, email, text message, or U.S. mail to the worker’s last known street address.

While legal challenges (ATS Tree Services, LLC v. FTC) to this questionable (i.e., non-delegation doctrines) regulation will occur, it is recommended that business owners begin the proactive step of identifying those employees who may have a Non-compete Agreement in place, and review any existing Employee Confidentiality, Non-disclosure, and Non-solicitation Agreements to ensure legal compliance, until otherwise notified by legal counsel.

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