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FTC’s New Rule Banning Noncompete Agreements: What Businesses Need to Know

 

The Federal Trade Commission (FTC) recently passed a new rule significantly limiting the use of noncompete agreements in employment contracts. The Commission said the rule will impact an estimated 30 million workers.

 

What Are Noncompete Agreements?

Noncompete agreements are clauses in employment contracts that restrict employees from working for competitors or starting a similar business within a specified period and geographic area after leaving an employer. Historically, these agreements have been used to protect trade secrets and maintain a competitive edge by preventing key employees from taking their skills and knowledge to competitors.

 

The FTC’s New Rule

In a nutshell, the FTC’s new rule bans noncompete agreements. Employers may no longer execute new noncompete agreements with employees, and existing noncompete agreements are unenforceable, except in very narrow circumstances.

 

The law goes into effect September 4, 2024, and the FTC may issue fines to employers who do not comply. Employers must also provide notice to workers who are bound by an existing noncompete that they will not be enforcing any noncompetes against them.

 

When the FTC first proposed this rule, it received over 26,000 comments from the public, overwhelmingly in support of banning noncompete agreements.

 

Exceptions

The rule allows a narrow exception for “senior executives.” If an existing noncompete is in place for a senior executive, companies can continue enforcing the agreement. Employers may not, however, enter into any new noncompetes with senior executives. Senior executives include employees earning more than $151,164 annually and who are in “policy-making positions.”

 

FTC Rationale

In its release announcing passage of the rule, the FTC outlined their motivation for taking this action. The Commission stated that noncompete clauses keep wages low, suppress new ideas, and keep American workers from pursuing a new job or starting a new business.

 

The agency referred to noncompetes as an “often exploitative practice” that forces workers to stay in a job they would otherwise leave or cause other harms such as switching to a lower-paying field or being forced to relocate. The FTC estimates that banning noncompetes will lead to:

• 8,500 additional new businesses created each year.
• Higher earnings for workers.
• Lower health care costs.
• Tens of thousands of additional patents each year.

 

Implications for Employers

Employers will need to re-evaluate their existing employee agreements as well as methods for protecting sensitive business information. Employers should:

1. Review and Revise Employment Contracts: Employers should review existing employment agreements and prepare to rescind noncompete clauses. Employment agreements should be revised so that noncompete agreements do not appear in contracts with any future employees.
2. Make Required Notifications: If employers have existing noncompete agreements in place, they must take action to notify employees that these agreements will not be enforced. The FTC has provided model language that employers can use to communicate to workers.
3. Revisit Intellectual Property Protections: Businesses may need to strengthen other forms of intellectual property protection, such as nondisclosure agreements (NDAs) and confidentiality clauses, to safeguard sensitive information.

 

A Note on Litigation

Immediately following adoption of the rule, business groups filed a lawsuit against the FTC claiming that the agency exceeded its authority in passing this rule. The groups claim that policy decisions of this magnitude should be left to Congress, not the FTC. The effective date of the rule could be postponed if the courts decide to grant a stay or preliminary injunction. In the meantime, businesses should still prepare for compliance.

 

Schroon Law Can Help with FTC Compliance

The FTC has a long history of issuing hefty fines for non-compliance. Businesses should take immediate action to ensure they have a compliance plan in place before September. Schroon Law can help ensure your employment contracts are compliant with the rule. We can also advise you on ways to ensure your intellectual property is protected when employees leave your business.

Get in touch with us today for a consultation.