In April 2024, the US Federal Trade Commission (FTC) ruled that most employee non-compete agreements were unlawful. The new rule is scheduled to go into effect in September 2024, but there are several actions you should take in the meantime to limit potential risk to your organization.
What’s in the New Non-Compete Rule?
Following a lengthy review process, the FTC found that employee non-competes are “unfair methods of competition” and violate Section 5 of the FTC Act. As a result, effective September 4, 2024, most employers will be barred from executing new non-competes and enforcing those already in place.
The non-compete ban will effectively allow employees to work in the same position for any new employer without penalty. It covers nearly all worker categories, including full-time and part-time employees, independent contractors, interns, volunteers, apprentices, and sole proprietors.
There are some limited exceptions to the rule. It doesn’t apply to:
- Existing non-competes with senior executives who are in policymaking positions and earn more than $151,164 per year
- Employers in specific industries, including banks, savings and loan organizations, federal credit unions, carriers such as airlines and railroads, and non-profits
- Existing agreements between businesses, for example, franchisor arrangements and acquisitions
- Agreements where a breach of contract or other cause of action occurred before the September 2024 effective date
- Non-compete clauses in fixed-term employment agreements and garden leave agreements
What You Should Do Before the Non-Compete Rule Takes Effect
While the new FTC rule will give employees more freedom to work with competing organizations, it poses potential risks to employers. Losing even one key employee to a competitor could spell disaster for many businesses.
If you have current or former employees subject to a non-compete and you want to protect your business while remaining compliant with applicable laws, take the following actions:
1. Start planning now
Though you aren’t required to make any changes until the rule’s effective date, now is a good time to review existing non-compete agreements and consider how the rule will affect your workforce and business. As you conduct your review, be sure to consider the following:
- Other restrictive covenants: Some agreements not explicitly called “non-competes” are considered such by the FTC. Therefore, you should review all non-solicitation provisions, non-disclosure agreements, and training repayment agreement provisions (TRAPs) to ensure they don’t violate the new rule.
- Employee notifications: Before the rule takes effect, you’ll need to notify current and former employees that their non-compete agreements are no longer enforceable. The FTC provides a model notice you can use, but it may be sensible to wait until you get closer to the effective date (just in case the date is pushed back or the rule changes).
- Non-competes for employees in specific states: As we mentioned in a recent webinar discussion, several states, such as Illinois, California, and Virginia, already enforce laws regarding non-compete and non-solicitation agreements. The new FTC rule preempts these laws, but if a state law provides more worker protections, you should comply with the state law and determine how many employees would be impacted.
2. Monitor ongoing developments
As is often the case with landmark rulings, several entities have filed lawsuits challenging the non-compete rule. If any are successful in having the law vacated or an emergency stay approved, you may not be required to take any action, at least not anytime soon. You may know as soon as July 3, 2024, when an emergency stay motion for one of the lawsuits will be decided in court.
3. Get legal advice
The new rule is relatively straightforward, but consulting with an attorney can help you understand the underlying rule language and other details. For example, legal counsel can help you determine which employees are in “policymaking positions” and whether your existing non-solicitation agreements will be considered non-competes under the new rule.
Aspen HR has an expert employment attorney and HR consultant on staff, available to answer questions and ensure each of our clients receives guidance for complying with the new FTC rule and other applicable labor laws.
4. Consider non-compete alternatives
Though you may have relied on non-compete agreements as the primary tool for protecting your business, there are some alternatives to consider. For example, you can work with an attorney to draft confidentiality and non-disclosure agreements that don’t violate the non-compete rule. You can also enhance compensation incentives and make culture improvements that make working for a competitor less appealing to your employees.
Maintain Ongoing Compliance With Aspen HR as Your Guide
The new non-compete rule is just one of many legislative updates affecting your business, and Aspen HR is here to help. Our dedicated team of HR, benefits, and payroll professionals includes a full-time employment attorney, setting us apart from other PEOs. Within our suite of white-glove PEO services, we provide full-service employer liability management solutions to help you manage risk and maintain compliance with employment laws as they evolve.
Connect with an Aspen HR expert to learn more.
