The U.S. Federal Trade Commission (FTC) recently announced a new rule that will significantly alter the landscape of employment agreements used by businesses throughout the United States. This rule bans most non-compete agreements, a move that could impact countless workers and employers. Understanding the implications of this proposed rule is crucial for business owners. If you have concerns about how this change might affect you or your business, an experienced attorney can help you navigate these legal issues.

What Is the FTC’s New Rule on Non-Compete Agreements?

The FTC’s rule prohibits employers from entering into non-compete agreements with workers. Non-compete agreements may prevent employees from working for competitors or starting a similar business within a certain geographic area and time frame after leaving a company. The FTC argues that these agreements stifle competition, suppress wages, and hinder innovation. The new rule will go into effect on September 4, 2024, and it will make the following changes:

• Ban on new non-compete agreements: Non-compete clauses cannot be included in new employment contracts. Non-compete agreements cannot be used for employees, independent contractors, interns, temporary workers, or most other workers.
• Nullification of existing agreements: The rule also prevents employers from enforcing existing non-compete agreements with the exception of some high-level executives. However, employers may still take action to enforce any violations of existing agreements that take place before the rule goes into effect.
• Applicability: The rule would apply broadly across industries throughout the United States. However, it will not apply to employers that are outside the jurisdiction of the FTC, including certain banks and financial institutions, air carriers, and non-profit organizations.

Exceptions to the Rule

While the rule is broad, there are certain exceptions:

• Sale of a business: Non-compete agreements may still be permissible in the context of the sale of a business, as long as there is a transfer of ownership of at least 25 percent of a business. This allows buyers to protect their investment by preventing sellers from immediately starting competing businesses.
• Senior executives: Limited exceptions apply for executives who meet certain criteria. Existing non-compete agreements may still be enforced for senior executives in policy-making positions who earn an annual salary of at least $151,164.

How Will the Rule Affect Companies?

The rule is designed to apply universally to most employers in the United States. To address these changes, companies may need to:

• Review employment contracts: Employers may need to review and update contracts with employees or other workers to ensure compliance with the new rule.
• Notify employees: Employers must formally notify employees that existing non-compete agreements cannot and will not be enforced. These notices must be in writing, and they may be provided through written memos, mailed letters, emails, or text messages.
• Adjust hiring practices: Companies will need to focus on other ways to protect trade secrets and retain talent, such as through non-disclosure agreements (NDAs), non-solicitation agreements, or fixed-term employment contracts. However, these agreements cannot have the effect of preventing workers from seeking employment with other companies or starting new businesses.

Potential Challenges to the Rule

While the rule is scheduled to go into effect as planned, there have been several legal challenges. A lawsuit filed by the U.S. Chamber of Commerce seeks to invalidate the rule, claiming that the FTC does not have the authority to restrict or ban non-compete agreements. Unless courts choose to block the rule while lawsuits are ongoing, it will take effect on September 4, 2024.

Contact Our Oakland Park, FL Employment Contracts Attorney

The ban on non-compete agreements represents a significant shift in employment law. For those who use non-compete agreements, it is important to understand how this change will affect their ability to protect trade secrets and defend against unfair competition. At The Elliot Legal Group, P.A., our Fort Lauderdale business contracts lawyer can provide guidance on how to navigate these changes. We will work with business owners to determine the best steps they can take to protect their interests. Contact us at 754-332-2101 to arrange a consultation today.