The Federal Trade Commission (FTC) has made significant changes to the landscape of employment agreements with its final rule banning noncompete clauses. After an initial vote in April, the FTC published its final rule in the Federal Register on May 7, 2024 which is scheduled to take effect 120 days later – on September 4, 2024.
Purpose of the Rule
According to the FTC, "the purpose of this rulemaking is to address conduct that harms fair competition." It is also meant to enhance employee mobility. The FTC also stated the rule is intended to lead to new business formation, higher earnings and lower health care costs while driving innovation.
Regardless of the intended outcome or the future effects of the ruling, in this article we'll focus on the actionable steps employers can take to make sure they are prepared for its effective date in September.
Overview of the Key Provisions of the Final Rule
- Scope: The ban applies broadly, prohibiting employers from entering into, attempting to enter into, maintaining, or enforcing existing noncompete clauses with workers, including employees, contractors, interns and certain other types of workers.
- Basic Exceptions: For senior executives, existing non-competes can remain in force, while existing non-competes with other workers are not enforceable after the effective date.
- Notification: Employers must notify all employees that their existing noncompete agreements will not be enforced.
Other Exceptions
While the final rule bans noncompete clauses in virtually all circumstances, there are a few narrow exceptions to the ban, including:
- Bona fide sale of business: One exception is a noncompete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.
- Existing causes of action: The final rule does not apply where a cause of action related to a noncompete clause accrued prior to the effective date of the final rule; and
- Good faith belief that the final rule is inapplicable: The FTC will not consider it to be an unfair method of competition to enforce or attempt to enforce a noncompete clause or make representations about a noncompete clause where a person has a good-faith basis to believe that the final rule is inapplicable.
In addition to the above exceptions, the final rule does not apply to any of the following:
- Banks;
- Savings and loan institutions;
- Federal credit unions;
- Common carriers;
- Air carriers; and
- Certain nonprofit organizations.
Key Action Steps
Audit Existing Agreements
Start by conducting a thorough audit of all current employment and contractor agreements to identify any noncompete clauses. Understand the scope, limitations and any state-specific provisions that may be affected differently by the FTC's new rule.
Update Existing Agreements
Update templates and standard contracts to remove noncompete clauses. For current agreements that include them, prepare amendments to eliminate these provisions. Ensure that your legal team reviews these changes for compliance with both federal and state laws.
Prepare Communications for Affected Employees
Draft clear and concise communications to inform current and former employees whose contracts are affected by the change. Explain the rationale behind the removal of noncompete clauses while affirming your organization's commitment to compliance and employee development.
Consider Alternatives to Noncompetes
Explore legal alternatives to noncompete agreements that can protect your company's interests without violating the ban. These might include:
- Nondisclosure Agreements (NDAs): A confidentiality agreement is a binding contract or clause pursuant to which an employee agrees not to disclose specified confidential or proprietary information or intellectual property. According to the FTC, over 95% of workers with a noncompete already have an NDA as well.
- Non-Solicitation Agreements: Customer and employee non-solicitation agreements prohibit former employees from soliciting business from their former employer’s customers or clients either independently or while employed by a new employer.
- Fixed-Term Employment Agreements: Under these contracts, employers can sue an employee who leaves before the end of the contract term for damages arising from the contractual breach. However, the employer cannot bar them from accepting a position with a new employer and they may be limited in their ability to terminate the employee without cause prior to the end of the contract term.
- Garden Leave Clauses: A leave provision where the worker remains employed and receives the same total annual compensation on a pro rata basis would not be considered a noncompete because it is not a post-employment restriction. By offering garden leave, employers can ensure that the employee does not work for a competitor shortly after ceasing their work for the employer, even though they have been relieved of their duties.
Ensure any alternative measures are carefully crafted to comply with regulations and accomplish your intended goals without overreaching.
Prioritize Employee Retention
With the removal of noncompete clauses, focusing on employee retention strategies becomes even more critical. This includes offering competitive salaries, benefits, career development opportunities and fostering a positive workplace culture. Continue to invest in these important areas: if the employee was only sticking around because of a noncompete, it's now more important than ever to get these aspects of culture right.
Prepare for Uncertainty
Stay informed about legal challenges and potential modifications to the rule. One great way to do this: sign up for our weekly Legal & Compliance Roundup, a newsletter which covers new policies and upcoming deadlines regarding healthcare compliance.
It may also be wise to consult with legal counsel specializing in employment law to navigate through these uncertain times effectively.
Final Thoughts
The FTC’s ban on noncompete agreements represents a significant shift in employment law that employers must proactively prepare for. By auditing existing agreements, revising employment contracts, developing alternative protective measures, focusing on retention and staying informed about legal developments, businesses can navigate these changes while safeguarding their interests and maintaining compliance.
Consider discussing these changes with your benefits advisor. And, as we mentioned previously, to keep up to date with the latest healthcare compliance updates, click below to sign up for our Weekly Roundup!
For more information on the ruling, consult the FTC's Fact Sheet.
This article was produced in a partnership with Zywave.
This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.