Non-compete agreements, often used to protect business interests by restricting the ability of employees to enter into competition with their former employers, have been a staple in employment contracts for years.
As detailed in our previous discussion on non-compete agreements published on March 4, 2024, these agreements are designed to safeguard trade secrets and investments in employee training while balancing the rights of workers.
Recent significant changes to this practice, brought about by a new ruling from the Federal Trade Commission (FTC), seeks to reshape how these agreements are implemented across various industries.
Non-Compete Agreement Recap
Non-compete agreements are designed to prevent employees from taking jobs with competitors or starting similar businesses shortly after leaving a company. The primary purpose of these agreements is threefold:
- Protecting trade secrets.
- Protecting investments in employee training.
- Preventing unfair competition.
Despite some clearly legitimate reasons for these agreements, though, they have been a topic of contentious debate, viewed by some as unduly restrictive and anti-competitive—and serving to stifle wages, hamper individual career progress, and limit employees’ overall economic growth by preventing them from moving freely between jobs.
The recent FTC ruling seeks to address these concerns by altering the legal landscape in which these agreements operate, signaling significant changes for employers and employees alike.
Overview of the New FTC Ruling
The new FTC ruling represents a dramatic shift in the regulation of non-compete agreements. As described in a recently published fact sheet from the FTC, the ruling prohibits employers from imposing non-compete clauses on the vast majority of workers. The idea is to promote greater labor mobility and economic freedom, reflecting a broader governmental push toward enhancing fair competition and innovation within the workforce.
There is a key exception in the ruling for non-compete agreements with senior executives. Employers can continue to enforce such agreements with this small group of key business leaders. After all, these high-ranking officials often have particularly in-depth knowledge of a business’s strategies, trade secrets and customers.
Once the new FTC ruling becomes effective, employers will still be able to enforce existing non-competes against senior executives; however, employers will no longer be permitted to put new non-competes in place with senior executives.
The FTC rule defines senior executives as those workers earning more than $151,164 who are in a “policy-making position.” The FTC estimates that these workers represent less than one percent of the overall American workforce.
Effective Date of the New Ruling and Potential Challenges
The new FTC regulation on non-compete agreements is set to take effect starting July 1, 2024. This gives companies and employees a transition period to adjust their contracts and practices to comply with the new legal framework. This grace period is crucial for both parties to understand the full implications of the ruling and to renegotiate terms that align with the new regulatory environment.
Keep in mind, though, notes Rober W. Feicht, a board-certified litigator with Gunster’s labor and employment practice group, that “the final rule will not be effective until 120 days after its publication in the Federal Register, which has not yet occurred as of this alert.” Even then, he says, “lawsuits vigorously challenging the FTC legal authority are expected.”
Already, Feicht says, several business groups and politicians have questioned the FTC’s authority to invalidate contracts when the proposed rule was first released last year. “Perhaps in response to anticipated legal challenges, the 570 page final rule includes significant portions dedicated to argument and legal citations supporting the FTC’s position that it has the legal authority to ban these types of contract without using the normal legislative process,” he says.
Many business groups and industry associations will argue that the ruling infringes on the ability to protect legitimate business interests, such as proprietary information and investment in employee development. Several business groups have already filed lawsuits against the FTC challenging the rule.
The challenges focus on the authority of the FTC to impose such broad restrictions and whether the rule appropriately balances the interests of businesses with those of employees. In addition, litigation may arise concerning the interpretation of what constitutes an “unfair” non-compete agreement under the new guidelines.
Practical Business Considerations
In light of the FTC’s ruling, businesses must reconsider their strategies for protecting intellectual property and retaining talent.
“Here’s the good news,” says Jon Morgan, CEO, and editor-in-chief of Venture Smarter. “The FTC’s ban doesn’t prevent you from protecting your confidential information. Solid confidentiality agreements and clear company policies on data security are still crucial. Educate your employees about these policies and the consequences of violating them.”
Nicole Griffin, talent acquisition leader at Korn Ferry, agrees and points out that “by emphasizing the expanded use of NDAs, businesses can establish clear expectations regarding the confidentiality of information, ensuring that it remains protected even after employees leave the organization.” Not only do NDA’s deter people from disclosing confidential information but also provide legal recourse in the event of breaches, Griffin says, “thereby enhancing overall security and trust within the business ecosystem. As companies navigate a landscape where non-competes are no longer a viable option, robust NDAs serve as a foundational tool for safeguarding valuable assets and maintaining a competitive advantage in the marketplace.”
Griffin also points to garden leave clauses, popular in the European Union, as another means to protect their business interests. “Garden leave provisions allow employers to place departing employees on paid leave for a specified period before their official departure date, effectively keeping them away from sensitive projects and client interactions during the transition period,” she says. By using garden leave, she points out, “companies can mitigate the risk of departing employees immediately joining competitors and potentially leveraging insider knowledge or relationships to the detriment of the business.”
Businesses should also focus on improving workplace incentives and culture to retain employees organically. Training programs, career development opportunities, and competitive compensation packages could become more crucial than ever in maintaining a loyal and committed workforce.
Steps to Ensure Compliance
As the FTC ruling on non-compete agreements nears implementation, businesses must take proactive steps to ensure full compliance. Lauren Aydinliyim, an academic and former lawyer specializing in employee non-compete agreements an assistant professor at Baruch College, recommends that employers:
- Review contractual provisions. “Employers should carefully review not only straightforward non-competes but also severance agreements, forfeiture-for-competition provisions, non-disclosure agreements (NDAs), and training agreements, as these (likely) operate similarly to non-competes under the rule,” Aydinliyim says.
- Seek legal guidance. “Given the ongoing legal challenges and the evolving nature of the rule, it’s critical to consult with legal counsel to ensure compliance and understand any nuances in a specific industry.”
- Prepare for notice requirements. “The rule mandates specific notice requirements for existing non-competes,” Aydinliyim says. “Fortunately, for employers, the rule also includes a sample notice. Employers must be prepared to provide these notices to avoid legal complications when the rule takes effect.”
- Identify senior executives. “Since the rule allows existing, pre-effective date, non-competes for senior executives, employers should identify which employees meet this designation and implement non-competes accordingly and as soon as possible, if desired.”
There are also specific implications for healthcare and nonprofit organizations, Aydinliyim notes.
The FTC’s new ruling on non-compete agreements marks a significant change in the employment landscape. As this ruling comes into effect, both employers and employees must navigate the challenges and opportunities that arise.
While the ruling is likely to face legal challenges, the direction is clear—a move toward greater freedom for employees to advance their careers without undue restrictions. Businesses, in turn, should focus on alternative methods to protect their interests and retain talent, while ensuring compliance and fostering a positive workplace.
Lin Grensing-Pophal is a Contributing Editor at HR Daily Advisor.