By now you have read that the U.S. Federal Trade Commission (FTC) announced its Final Rule (Rule) banning most employment non-compete agreements with limited exceptions. The U.S. Chamber of Commerce and others have since sued the FTC arguing that it is not empowered to police such contracts. The Rule would have been effective in late August, but those lawsuits and other anticipated legal challenges will likely extend that timeline. Employers should proactively use this time to assess their next steps.
Summary Of The FTC’s Rule:
The bottom line is that the Rule provides for a comprehensive ban on new non-competes with all workers (even executive level employees). The FTC’s position is that non-competes are an unfair method of competition and therefore a violation of FTC Act §§5 and 6(g). The Rule even expands the ban to existing non-competes with a narrow exception for senior executives. Beware, though, as “senior executive” is limited to a worker in a “policy-making position” that earns more than $151,164 annually. The Rule also does not prevent an employer from enforcing non-compete clauses where an employee breached a non-compete agreement before the effective date of the Rule. The Rule requires an employer to provide clear and conspicuous notice to workers subject to a prohibited non-compete, in an individualized communication, that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker. The employer must provide notice by the Rule’s to-be-determined effective date.
What Employers Can Do Now:
While the Rule is being challenged, employers can take several steps to protect themselves and be prepared for whatever changes may come. A wait-and-see approach is not recommended. At a minimum, employers should:
- Perform an internal assessment of existing agreements to determine how many exist and whether the Rule impacts them.
- Conduct a cost-benefit analysis addressing whether to revise agreements that do not comply with the Rule.
- Consider whether your business interests can be protected with other restrictive covenants such as properly tailored non-solicitation or confidentiality clauses, which are not intrinsically prohibited by the Rule.
- Revisit policies on employee access to trade secrets, consider limiting trade secrets access to only those employees who need it and make sure non-disclosure agreements are in place.
- Employers should also not overlook the importance of having a robust employee retention strategy, and evaluate workplace quality issues such as work flexibility, compensation, and benefits.
RLL’s experienced employment attorneys are here to answer any questions or provide advice to employers about restrictive covenants and related agreements. Please contact the head of our employment law practice, Gerd Stabbert, with any questions or concerns.
Authors: Kaylee Ivy and Gerd Stabbert