Non-Compete Agreement Ban: What It Means for Employers

In a groundbreaking move by the federal government, regulation was finalized aiming to outlaw non-competition agreements for a wide spectrum of employers and workers. Should this regulation withstand legal challenges, it will not only bar the initiation of new non-compete contracts but also restrict the enforcement of existing ones, except in specific scenarios such as those involving senior executives.

Additionally, employers will be mandated to notify current and former workers that their non-compete agreements no longer hold validity. Though the rule isn’t planned to take effect until September 2024 and is currently facing legal challenges, it’s wise to start preparing. Here is an overview of the final rule and what you need to know as a business owner.

Key Points of the Rule

The regulation, finalized by the Federal Trade Commission (FTC) on April 23, 2024, addresses three pivotal aspects:

1. Businesses are no longer allowed to enter into non-compete clauses with workers (whether full-time or part-time, including employees, independent contractors, interns, externs, volunteers, apprentices, and others).
2. Existing non-compete agreements can no longer be enforced, except for those that cover certain senior executives.
3. Explicit notice must be provided to both current and former workers regarding the withdrawal of their non-compete agreements.

Understanding Non-Compete Agreements

The regulation defines “non-compete agreements” as any employment term or condition that forbids, penalizes, or obstructs a worker from seeking or accepting employment with another business or launching their own venture.

While the FTC’s regulation doesn’t outright prohibit other protective measures for employers, such as customer non-solicitation agreements or confidentiality clauses, it stipulates that their validity hinges on not impeding job opportunities. Hence, consulting with legal experts is imperative for guidance on these agreements.

Identification of Senior Executives

In the final rule, “senior executives” are defined as employees earning over $151,164 annually and holding policy-making positions. Existing non-compete agreements with these high-level employees remain permissible for enforcement. However, it’s noteworthy that the FTC estimates the proportion of “senior executives” among all workers to be less than 0.75%.

Notice Requirements

Before the regulation’s effective date, employers must provide notice to workers, clarifying the withdrawal of their non-compete clauses and the non-enforceability of such agreements unless they pertain to senior executives. Notice guidelines include:

• Clear and conspicuous notice identification.
• Delivery in digital or paper format.
• Exemption for workers lacking contact information such as street address, email address or mobile phone number.
• Provision of notice to both current and former workers potentially affected by active non-compete clauses.

The regulation provides model notice language and a safe harbor for compliance, although deviation from the model notice may affect the extent of legal protections.

Next Steps and a Strategic Plan

If the rule can withstand legal challenges, it is anticipated to take effect in early September 2024. Here’s a personalized five-step plan to navigate the evolving landscape:

1. Regroup with key decision makers to identify how this affects your business.
2. Review existing non-compete agreements with current and former workers. This will help you have a good overview of which workers this may affect and who you will need to provide notices to.
3. Identify senior executive positions for enforcement.
4. Explore alternative strategies with leadership to safeguard business interests with less restrictive measures (i.e. non-solicitation agreements or confidentiality clauses).
5. Strengthen trade secret protection measures such as training employees, limiting access to intellectual property to only those who need it, and using technology safeguards.

We know how difficult it can be to maintain compliance and keep up with ever-changing human resources laws and regulations. That’s where our team of HR experts can help. We monitor federal and state updates to the laws and notify affected employers with the necessary information to keep their businesses compliant. To learn more about how we can help your business, contact us.