New FTC Rule Will Ban Non-Compete Agreements

 What Does This Mean for Employers?

Employer-issued non-compete agreements have historically been governed at the state level. In April, the Federal Trade Commission (FTC) voted to ban all future and most existing non-compete agreements within for-profit organizations – a move that could rewrite the way organizations across states currently operate. If the final regulations are enacted, these rules will affect approximately 30 million American workers bound by non-compete agreements today. The key features in these new rules are as follows:

• The vast majority of existing non-compete agreements will be void once the 120-day effective period ends (which began on April 23). Employer must inform their employees that their non-competes are no longer in effect.
• An exemption to the new rule applies for existing non-competes with “senior executives”: (1) who have annual salaries above $151,164; and (2) who are in a policy-making position. These specific non-competes are grandfathered in and not subject to the new rules.
• Once the 120-day period ends, no new non-competes can be entered into by employers and their employees, even with senior executives.
• The final ruling’s definition of a “non-compete clause” does not explicitly ban other restrictive employment agreements, such as non-disclosure agreements (NDAs), customer non-solicitation agreements or employee non-solicitation agreements, so long as they are not too extensive or vague.
• The new rule only applies to non-compete agreements between businesses and their employees. Non-compete agreements between businesses, while still subject to other antitrust laws, are excluded from the FTC rules.

Response to FTC’s Ban on Non-Competes

There was widespread and immediate response to oppose the FTC’s new rule. The day following the decisive ruling, the U.S. Chamber of Commerce, along with various business and lobbying groups, sued the FTC, challenging its authority to issue this rule.

These groups argued the rules were not based on any legislation passed by Congress; however, the FTC contended that non-compete agreements decrease competition and suppress wages for most workers. The FTC stated that “Non-compete clauses…prevent new businesses from forming, stifling entrepreneurship, and prevent novel innovation which would otherwise occur when workers are able to broadly share their ideas.”

Additional comments in favor of the new rules came from FTC Commissioner Rebecca Kelly Slaughter. She stated, “Non-compete agreements bind about one in five American workers. That’s astounding, and this is not limited to one sector of the economy or category of workers. Low and high wage workers, skilled and unskilled workers; this problem affects so many. And in fact, it really affects all of us.”

Many individuals predict that courts will strike the rule down and that it might ultimately be decided on by the U.S. Supreme Court. The expectation of additional lawsuits against the FTC could result in the postponement, rewriting or withdrawal of these rules.

Leading organizations, like the Society for Human Resource Management (SHRM), are urging the FTC to allow employers to continue using non-compete agreements with certain employees.

The Society for Human Resource Management’s (SHRM) Chief of Staff and Head of Government Affairs, Emily Dickens, stated: “The FTC’s proposal would impede SHRM members’ ability to balance the needs of workers and employers and will reduce the contractual capabilities of reasonable and consenting parties. The sweeping proposal significantly complicates HR professionals’ responsibility to protect their workforces’ intellectual property. Without the use of reasonable, narrowly tailored non-compete agreements, employers will be precluded from recouping their investments in employees, as well as artificial capital.”

However, not all organizations oppose the new FTC rules. According to Attorney David Woolf with Faegre Drinker in Philadelphia, “In a tight labor market, some understaffed employers support the FTC’s proposal because it would make it easier for them to recruit talent with relevant industry experience.”

According to the FTC, the agency received over 26,000 comments on its proposed regulations, with more than 25,000 comments supporting a categorical ban on non-compete agreements.

What Should Employers Do Now?

It’s important for employers to continue focusing on complying with existing applicable state laws regarding non-compete agreements. We encourage employers to look at these agreements and, pending enforcement of the new FTC rules, be prepared to consider altering any points that cover intellectual property and/or proprietary knowledge or solicitation of employees and customers. Employers, in these cases, could cover these matters with non-disclosure or non-solicitation agreements, which are not part of the FTC’s new rule change. Legal counsel should also be involved in this entire process, as input is critical in dealing with the FTC changes.

Employers may also face changes to their tax obligations related to these agreements. If a non-compete becomes unenforceable due to the pending changes under the FTC rules, it could impact when income is recognized by the employee and deducted by the employer under certain employee compensation or stock programs.

Even with the looming uncertainty, employers should consider implementing the following steps to mitigate the possible exodus of employees:

• Compensate employees with a competitive wage
• Provide career advancement opportunities and promote from within
• Ensure your leaders have adequate training to manage employees accordingly

As we near the possible implementation of the FTC’s new rule banning non-compete agreements, employers can review the FTC’s non-compete clause rule and guide for businesses and small entities here. Please contact our human capital leaders to discuss your current hiring and retention strategies, compliance with the FTC’s rule, and ways your organization can improve your human resources services.

Resources:

• https://www.washingtonpost.com/business/2024/04/24/ftc-noncompete-chamber-lawsuit/
• https://www.washingtonpost.com/business/2024/04/24/non-compete-ban-workers-ftc-employers/

About our Authors

Darren Smith, MBA, HRM, PHR, is a manager who brings in-depth knowledge of human capital management services to each client project. Darren excels at performing change management, organizational development, and strategic human resources and business processes services. He has extensive experience working in both shared services and Centers of Excellence business environments.

Laura Fischer, PHR, leads the talent acquisition consulting team within Sikich’s Human Capital Management & Payroll practice. With over a decade of experience in human capital, Laura has worked with hundreds of organizations, spanning across several industries and varying in size, to meet short-term objectives, while driving long-term organizational growth.

Jim Brandenburg, CPA, MST, possesses extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions, and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.