For years, employers have relied on non-compete agreements to help them compete in the workplace. As many employers are undoubtedly aware, the Federal Trade Commission (“FTC”) has introduced a rule that will effectively ban most non-compete agreements in employment contracts (the “Rule”). Non-compete agreements are extremely common in employment contracts and generally restrict an employee’s ability to engage in competition with the employer for a certain period of time and within a certain geographic scope after leaving their job. The Rule The Rule, which becomes effective September 4, 2024, bans non-compete agreements in almost all situations. There is a limited exception for “senior executives”, who must make more than $151,164 annually and are involved in “policy-making decisions” for the business. The Rule also permits non-compete agreements relating to the bona fide sale of a business entity. Outside of these exceptions, employers may no longer enforce active non-compete agreements after the effective date. The Rule defines non-compete agreements broadly as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” The Rule also requires that employers contact any employee who was previously subject to a non-compete agreement and inform them that the employer will no longer be enforcing the agreement. The FTC’s ban of non-compete agreements will impact millions of employees and thousands of employers. However, there has been push back from various employers. Almost immediately after the Rule was announced, several lawsuits were filed to prevent it from taking effect. Those lawsuits are still pending, but as of now, the Rule is still set to go into effect on September 4, although a federal court in Texas has indicated that it will render a decision on the enforceability of the Rule on or before August 30. What options continue to exist? Despite the non-compete ban, there are still tools available for employers to attract and retain talent while staying competitive in the workplace. To begin, the FTC has clarified that non-disclosure agreements, non-solicitation agreements, and agreements requiring employees to repay training expenses if they leave their job before a certain time are all still enforceable as long as they do not effectively function as a non-compete agreement. This is a determination that will be made based on the facts and circumstances of each case. While they are not perfect replacements for non-compete agreements, employers still have options to protect their interests when an employee decides to leave their job. One such option is to strengthen intellectual property (“IP”) assignment agreements to ensure that any intellectual property created by an employee during their tenure with the employer is owned by the employer. This includes inventions, designs, trademarks, and any other creative work developed on company time or with company resources. This ensures that employers retain control of anything developed by employees on the employer’s behalf and while utilizing the employer’s resources. Employers can also provide a more incentive-based reason for employees to stay with them and avoid the need for a non-compete substitute. Many employers offer non-qualified deferred compensation (“NQDC”) plans to employees. NQDCs are arrangements in which an employee elects to defer a portion of their compensation until a later date, typically retirement. These funds stay with the employer until they are paid out. These plans are not subject to the same stringent requirements as qualified retirement plans and are largely tax-exempt until they are paid out. These plans are ideal for keeping employees dedicated and aligned to your long-term interests. Confronting such a drastic change in the law like the loss of the non-compete agreement can be confusing. If you have questions about your obligations or options in light of the new FTC Rule, please contact your FGKS law attorney today. We will keep you apprised of any developments in the pending court cases as the information becomes available.The FTC’s Non-Compete Ban and Available Alternatives
