13 Jun How Does the New Ban on Non-Compete Agreements Work?
On April 23, 2024, the Federal Trade Commission (FTC) announced a new rule that essentially bans do not compete clauses. The FTC banning non competes means that companies will no longer be able to use non-compete clauses to stop workers from quitting and getting new jobs. There will only be a select number of exceptions to this rule, so it’s important for employers to review their policies before the ban goes into effect.
What is a non compete agreement? More importantly, how will this ban affect your business? Read on to learn more about the ban on do not compete clauses.
What Is a Non Compete Agreement?
Before we can discuss the ban, it’s important to first understand the answer to, “What is a non compete agreement?” Typically, this type of agreement is signed when an employee begins working for a company. It normally limits the employee from working for a similar business for a set amount of time. For example, a manager at a biotech firm may be prohibited from working in the biotech industry for two years after they leave their job.
While a do not compete clause often applies to highly paid or highly skilled employees, it has been misused in the past. Many fast food restaurants have used do not compete clauses with entry-level team members to keep them from leaving and moving on to different enterprises. In response, some states have banned using non-compete agreements for employees who earn less than a cutoff amount.
Why Is the FTC Banning Non Competes?
The FTC estimates that 8,500 startups aren’t getting formed each year because non-compete agreements get in the way. Through the FTC banning non competes, the agency expects to increase the pace of new business formation by 2.7% per year. Because they limit the amount of competition that can take place between employers, the FTC calculates that non-competes reduce the average employee’s wages by $524 per year.
This ban is supposed to achieve a few key benefits.
- More startup formations
- Higher earnings per worker
- Increased innovation
- Better bargaining power for employees
After rules about the FTC banning non competes go into effect, the FTC estimates that 17,000 to 29,000 patents will be created each year. In total, this ruling is expected to impact 30 million workers who are currently covered by non-compete agreements.
How the Ban Works
The FTC ban forbids almost every type of do not compete clause. Unless a very specific exception applies, your company cannot require or enforce non-compete clauses. In addition to banning non-compete agreements, the regulations involve notification requirements about the new rules. You’ll also need to make sure you don’t unintentionally have clauses in your other contracts that are similar to non-competes.
Notification Requirements
The non-compete ban involves notification requirements for your present and past non-compete contracts. You can notify employees via mail, email, phone, text, or in person that their non-compete contract no longer applies.
This notification requirement applies to current and past workers as long as they are still subject to a non-compete clause. If they are past the term length for the non-compete policy, you don’t have to notify them.
Enforceability
Are non-compete clauses enforceable? Up until the ban goes into effect, non-compete contracts are still enforceable.
The contracts you make with a senior executive will remain enforceable after the ban goes into effect as long as they are made before the ban starts. However, senior executives aren’t allowed to enter into non-compete contracts after the rule goes into effect, so the contracts are only enforceable if they are signed before September 4, 2024.
After this ban goes into effect, the majority of non-compete clauses are not enforceable. Additionally, it’s important for your company to review your non-solicit, non-disclosure, and non-recruit agreements. Sometimes, these agreements have provisions in them that may run afoul of the non-compete ban.
For example, the following contracts could potentially land you in hot water after the FTC ban goes into effect.
- A non-disclosure agreement (NDA) may be problematic if it prevents the worker from using non-trademark knowledge to do their job. If a company trains someone to work in a mill as a mechanic, an NDA that prevents them from working in a mill may violate non-compete rules.
- If a non-solicit agreement covers an entire geographic region, it may end up functioning as a non-compete agreement.
- Non-recruit agreements can become tricky when your current employees actively seek out the former employee and ask for a job.
Exceptions to the Ban on Do Not Compete Clauses
Over time, the FTC will be providing additional guidance about common questions and exceptions. Currently, the following five groups involve exceptions or special circumstances.
Senior Executives
Senior executives are held to the same standards as other workers. In a recent podcast with Mission to Grow, Brian Shenker, principal at Jackson Lewis PC., talked about exceptions to this rule. Like other workers, senior executives aren’t allowed to have non-compete contracts once the rule goes into effect. “However, if the company entered into a non-compete agreement with a senior executive prior to the effective date, that can still be enforced after the effective date,” Shenker says.
To be eligible for this rule, the executive must earn at least $151,164. This salary requirement doesn’t include retirement contributions, insurance, or other benefits.
Sale of Business
When someone sells a business, there are often specific clauses that limit the former owner’s ability to start a new business right away. Additionally, the new owner may be contractually bound to work at the company for a few months or years after the business changes hands.
Because of how unique this situation is, do not compete clauses are still allowed when a business is sold. In the past, owners had to possess at least 25% of the business in order to sign a non-compete agreement. Now, the exclusion applies to individuals who own any amount of the business.
Non-Profit Organizations
The FTC doesn’t regulate non-profit organizations, so non-profit organizations are theoretically exempt. However, the FTC appears to be taking the position that non-compete agreements will still apply to non-profit groups if they are pursuing profit-making activities.
Franchises
When it comes to franchisee-franchisor relationships, the FTC hasn’t categorically come out and said that non-compete agreements are against the law. However, they have mentioned that some of these non-compete clauses could violate state and antitrust laws, so you may want to check with an employment lawyer before you set up a non-compete agreement for your franchise owners.
Prior Violations
If one of your workers violates their non-compete agreement before September 2024, you can still go after them for it. Until the FTC ban goes into place, workers are held to their non-compete agreements. Even after the ban begins, you can still take legal action over prior violations as long as they occurred before the start of the ban.
When Does the Ban Start?
When does the FTC banning non competes begin? The ban is going to begin on September 4, 2024.
There are some lawsuits underway that could delay the ban’s planned start. However, business owners shouldn’t count on these lawsuits being successful. There is only a limited amount of time to get ready for the ban, so it’s important to start planning now. Even if the ban is delayed, you’ll be able to relax and enjoy the extra time because your company is already prepared.
Potential Enforcement Actions From the FTC
The FTC is a complaint-based agency, so it doesn’t do random compliance audits. A company will typically run into compliance issues after an aggrieved employee comes forward with a complaint. If the FTC decides the complaint has merit, you may have to deal with a range of enforcement actions. For instance, you may be subjected to fines, penalties, and injunctive relief.
Start Preparing for Non-Compete Changes Today
What is a non-compete agreement ban? Will the FTC banning non competes impact your company?
Right now, your business needs to determine if you have a do not compete clause in place. Then, you need to figure out how you’ll notify employees who previously had a non-compete policy about the upcoming changes. You’ll also want to review your other employment policies to make sure they don’t unintentionally violate non-compete rules.
This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.