The FTC’s Ban on Non-Competes: What It Means for Your Business (updated)

FTC Non Compete Ban

In a landmark move, the US Federal Trade Commission (FTC) has announced a rule banning non-compete clauses in employment contracts (please see August 21st updates below, which has effectively killed this ban). 

Understanding Non-Compete Clauses

Non-compete clauses are provisions in employment contracts that restrict employees from working for competitors or starting a competing business for a specified period after leaving a company. These clauses have been widely used to protect trade secrets and retain talent. However, critics argue that they stifle competition and limit employees’ career growth and mobility. The FTC’s ban is grounded in the belief that non-compete clauses unfairly hinder workers from finding new employment opportunities and depress wages. By eliminating these restrictions, the FTC hopes to create a more dynamic and competitive labor market.

The Legal Battle Ahead

This decision aims to foster competition and enhance work mobility, but it’s implications are complex of potentially are reaching. While the FTC’s decision marks a significant policy shift, its implementation faces potential hurdles. Many are saying that the FTC’s recent announcement to end non-competes for all employees faces slim chances of success, as the US Chamber of Commerce filed a lawsuit in Texas less than 24 hours later, making a complete ban on non-compete agreements doubtful. 

  • A second court has criticized the FTC’s noncompete ban. On August 14, the U.S. District Court for the Middle District of Florida ruled the ban unenforceable, echoing a similar decision by the U.S. District Court for the Northern District of Texas on July 3. 
  • All eyes are now on the Texas case, where the judge is expected to deliver a final ruling by August 30, potentially impacting the FTC’s rule. 
  • Meanwhile, Pennsylvania has passed a new law banning noncompete agreements for most medical professionals, effective January 1, 2025.

Updates as of August 21: A federal judge in Texas barred a US Federal Trade Commission rule from taking effect that would ban employers from requiring their workers to sign non-compete agreements. 

So if you were preparing to comply with the FTC’s ban by the September 4th deadline, you can now put those plans on hold. It’s likely that the 5th Circuit Court of Appeals or even the Supreme Court will have the final say, but given their current makeup, the outcome probably won’t change.

However, the issue of non-compete agreements isn’t going away. Why? Several states already ban them for all employment, and many others (plus D.C.) have restrictions based on income. 

Non-Solicitation Agreements: A Separate Matter

It’s essential to understand that this ruling, if it withstands potential legal challenges, does not affect non-solicitation agreements between corporations.It’s important to distinguish non-compete clauses from non-solicitation agreements. Non-solicitation agreements prevent individuals or entities from soliciting employees or clients from a business for a specified period. These agreements are designed to protect companies from losing key personnel and clients to competitors.

Unlike non-compete clauses, non-solicitation agreements are not affected by the FTC’s new rule. The ruling specifically targets clauses that restrict an individual’s ability to seek employment elsewhere. Non-solicitation agreements, however, involve agreements between corporations and do not impose restrictions on the individual’s employment choices.


What This Means for Businesses ….as of August 20, 2024

New info/ clarifications:

(1) Employers must notify workers before September 4, 2024 that their non-compete is un-enforceable. Check out the guide provided by the FTC here and the word document model notice here. Am email is ok, just ensure everyone has email and has access to their company email. The notice will probably be irrevocable, so if the courts change this rule, you cannot “undo” the notice. Tread lightly: contact an attorney first!

(2) States that have state laws that go above and beyond this ruling will apply. For example, if a state law (such as California) prohibit non-competes across the board or if a state law about banning solicitation agreements (such as Hawaii), the state law rules/ applies still.

(3) Many business are not covered by the ban. Why? The FTC has no jurisdiction over banks, savings & loans, credit unions, air carriers, meat packers, or non-profits. 

(4) Workers means both current and former W2 employees and 1099 contractors.

(5) Senior executives may still have an existing non-complete.

“Existing noncompetes for senior executives – who represent less than 0.75% of workers – can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompetes against them.” (Resource)

Who is a Senior Executive? Title is irrelevant. Pay and authority is. (Resource)

The FTC defines “senior executive” based on both an earnings test and a job duties test – and the job duties test is quite restrictive.

To be a senior executive, one must:

      1. Be in a “policy making position,” AND

      1. Receive total annual compensation of at least $151,164 in the preceding year (or annualized if the worker has not worked a full year).

    “The rule rollout will be – at best – a mess for American employers.  On the other hand, the rule impacts far fewer than 1 in every 5 American workers who signed noncompetes as part of their jobs. ” (Resource)

    Now What?

    Businesses need to stay informed about the evolving legal landscape surrounding employment agreements. Many lawyers are expecting more information/ decisions by August 30th. If the FTC’s ban on non-compete clauses remains in place (since many judges across the country are not in agreement on terminology and standing), companies will need to reassess their strategies for protecting trade secrets and retaining talent. Alternative measures, such as non-disclosure agreements and robust non-solicitation clauses (where allowed by state law), may become more prominent.

    Moreover, businesses should review existing contracts to ensure compliance with the new regulations and prepare for potential revisions. Legal counsel can provide guidance on navigating these changes and implementing agreements that align with the new regulatory environment.

     Understanding the distinction between non-compete and non-solicitation agreements will be crucial in ensuring compliance and protecting business interests in the evolving regulatory framework.

    Need more advice? 

    Contact Wendy Sellers, “The HR Lady®,” who can help you launch an employee engagement survey, analyze results, and begin change initiatives asap

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    Wendy Sellers
    Wendy Sellers, known as “The HR Lady®,” is a dedicated HR consultant and business partner of all size businesses, a conference speaker, and management trainer who specializes in understanding the unique culture and goals of organizations in order to improve business outcomes.

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