The Laws, They are a Changing, Part I: The FTC’s Ban of Post-Employment Non-Competes

While recent headlines have been filled with news of the Federal Trade Commission’s (“FTC”) final rule banning post-employment non-competes (the “Non-Compete Ban”), the Department of Labor (“DOL”) and the Equal Employment Opportunity Commission (“EEOC”) have also been busy issuing new rules, regulations and guidance that significantly impact employers. Over the next few issues, we will be summarizing these significant changes, including the DOL’s Final Rule addressing the salary requirements for the overtime exemptions under the Fair Labor Standards Act, the EEOC’s Final Rule on the Pregnant Worker’s Fairness Act, and the EEOC’s updated Enforcement Guidance on Harassment in the Workplace, in a series of easily digestible articles so that you can begin to assess your current workplace structure and policies and know when to reach out for guidance. 

For our first article in this series, we will answer the question everyone is asking, “What do we need to do about the Non-Compete Ban?”.  The answer, for the moment, is not to panic and to take a wait-and-see approach. The U.S. Chamber of Commerce and several other entities have filed lawsuits challenging the Non-Compete Ban, arguing that the Non-Compete Ban exceeds the FTC’s authority and that it is arbitrary and capricious. Legal analysts suspect that these arguments will prevail and that the Non-Compete Ban will be enjoined in full or in-part before it even goes into effect.

Of course, this does not mean that employers should do nothing. Now is a good time to review your existing non-compete agreements and other forms or policies with restrictive covenants, such as non-solicitation and non-disclosure provisions. Even if the Non-Compete Ban does not go into effect, other recent legal developments, such as the Speak Out Act and the National Labor Relations Board’s renewed focus on contractual terms that may “chill” an employee’s Section 7 rights, could require employers to revise older forms and policies.

In addition, employers should anticipate continued focus on restricting the use of non-competition agreements due to the number of entry/lower-level employees who are often bound by such agreements. It is important to remember that non-competition agreements are only one tool an employer can use to protect confidential and proprietary business information and that courts are often not inclined to enforce a non-competition provision without an additional breach of a non-solicitation or non-disclosure provision.

Employers should also evaluate what steps they are currently taking to protect their trade secrets. This may include identifying and labelling trade secrets, securing trade secrets through limited access and contractual protections not just with employees but with independent contractors, suppliers and vendors, implementing appropriate cyber-security measures, and training employees about the importance of protecting the company’s trade secrets.

In the event that the Non-Compete Ban does go into effect, however, employers should be aware of these key facts:

• Effective Date: The FTC’s Final Rule on the Non-Compete Ban was published on May 7, 2024 and is scheduled to go into effect on September 4, 2024.
• Scope: The Non-Compete Ban applies to “workers,” which is broadly defined to include employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide a service to a person.
• Prohibited Conduct: The Non-Compete Ban declares that an employer engages in unfair competition when it 1) enters into or attempts to enter into a non-compete clause with a worker; 2) enforces or attempts to enforce a non-compete clause with a worker; or 3) represents that a worker is subject to a non-compete clause.
• Application to Senior Executives: For “senior executives,” defined as workers earning over $151,164 annually in policy-making positions, an employer engages in unfair competition when it: 1) enters into or attempts to enter into a non-compete clause after the effective date; 2) enforces or attempts to enforce a non-compete clause entered into after the effective date; or 3) represents that an executive is subject to a non-compete clause that was entered into after the effective date.
• Notice Requirement: Employers must notify relevant workers prior to the effective date that non-competes will no longer be enforceable as of the effective date. The FTC has provided model notice language, which can be downloaded as a word document using this link: Model Notice Language Docx.
• Exclusions: The Non-Compete Ban does not apply 1) to non-competes entered into as part of a bona fide sale of a business entity; 2) where a cause of action to enforce a non-compete accrued before the effective date; or 3) where there is an attempt to enforce a non-compete and there is a good-faith basis to believe the final rule is inapplicable. It also does not apply to entities which are excluded from the FTC Act, such as many non-profit organizations and banks.

As always, we are here to assist you in staying apprised of any major labor and employment law developments. In order to ensure that you receive the most current announcements and information, please keep us updated as to any changes to your company contacts or email addresses.

THIS ARTICLE IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSIDERED LEGAL ADVICE. LEGAL ADVICE CANNOT BE GIVEN WITHOUT INFORMATION ABOUT YOUR SPECIFIC SITUATION.