As technology has rapidly evolved, and the value of intellectual property has skyrocketed, so has employers’ use of noncompete agreements. Many different types of organizations have deployed these agreements to prevent employees from taking valuable information and key customers with them to competitors if they decide to leave their jobs.
But, on April 23, the Federal Trade Commission (FTC) said no more. Citing a violation of Section 5 of the FTC act, the agency announced a final rule that will ban the use of most noncompetes when and if it takes effect later this summer.
Rationale for the rule
In the FTC’s view, use of noncompetes has become so widespread that it’s unfairly suppressing wages, inhibiting innovation and negatively affecting workers’ ability to earn a living. According to the agency, 18% of U.S. workers are currently covered by such agreements. That amounts to one in five workers — or 30 million people. By banning the use of noncompetes, the FTC estimates that annually:
- Typical workers will earn $524 more,
- More than 8,500 new start-ups will be launched, and
- An average of 17,000 to 29,000 more patents will be issued over the next 10 years.
Said FTC Chair Lina M. Khan, “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”
Key details
The final rule requires employers to notify affected employees that existing noncompetes will no longer be enforced as of the rule’s effective date — that is, 120 days after publication in the Federal Register. On its website, the FTC states the expected effective date is September 4, 2024. At that time, employers will also be prohibited from entering into new noncompetes.
There’s a notable exception, however. Existing noncompetes for “senior executives” can remain in force. The final rule defines these as employees who earn more than $151,164 a year and are in “policy-making positions.” This generally includes a business entity’s president; chief executive officer or the equivalent; any other officer with policy-making authority; or any other “natural person” with policy-making authority who’s similar to an officer.
The earnings threshold includes base salary and nondiscretionary bonuses but excludes discretionary bonuses and fringe benefits. Also, there can be varying definitions of the term “year.” So, some employers may want to seek guidance from professional advisors on whether senior executives or officers fall above or below the threshold.
What employers can do
The FTC contends that its ban on noncompetes doesn’t leave employers helpless. According to the agency’s press release, “Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information.”
It’s important to note, however, that the final rule also prohibits overly broad NDAs, nonsolicitation clauses and training repayment agreement provisions. Thus, concerned employers should begin exploring with their attorneys how to craft carefully worded NDAs that protect specific proprietary information without violating the ban.
Beyond that, the FTC believes its final rule should drive employers to “compete on the merits for the worker’s labor services by improving wages and working conditions.” In other words, employee retention efforts are more important than ever.
Legal and compliance challenges
As is often the case with major employment policy developments, the ban was met with legal challenges — and more are expected. In fact, as of this writing, the U.S. Chamber of Commerce has already filed suit in the U.S. District Court for the Eastern District of Texas to block the FTC’s ban. Its argument is, essentially, that the agency lacks the legal authority to impose such a sweeping change.
Employers that use noncompetes would be well-advised to consult their attorneys and begin devising appropriate strategies. We can help you assess all your employment costs.
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