Publication date: July 8, 2024

The Federal Trade Commission (FTC) has officially published a rule banning the enforcement of most non-compete agreements in for-profit businesses. However…this rule doesn’t go into effect until September 4, 2024 (so you’ve got some time) and there are injunctions that have been issued to stop the rule from going into effect, so we are watching this one closely! Regardless, it’s important to understand what these rules are, what impacts they have, and how you can start to prepare for the changes.

First of all, what is defined as a non-compete agreement?

A non-compete agreement is a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking or accepting work with another business or operating a business (Federal Trade Commission, 2024).

This means non-solicitation, non-servicing, non-disclosure and confidentiality agreements, and non-recruiting agreements are not being affected by this rule.

Who’s included? Who’s excluded?

Included: All U.S. workers (including employees and independent contractors) with two exceptions:

1. Non-compete agreements for executives earning more than $151,164 annually and who are in policy-making positions  (president, CEO, and similar level positions) signed before the effective date of the rule (September 4, 2024) AND
2. Non-compete agreements obtained as part of a sale of a business or ownership interest.

Excluded: Since the FTC has no authority over non-profit organizations, it may be assumed that this new ruling does not affect these types of businesses; however, the FTC has also indicated that certain non-profit organizations may be affected by this new ruling. So, if you’re a nonprofit organization, it may be best to triple check with your attorney if these new rulings will apply to you. 

When did this ruling happen? And what impacts will it have?

On April 23, 2024, the FTC issued a final rule banning non-compete agreements. The Commission’s goal of this ban is to promote competition, protect workers’ freedom to change jobs, increase innovation, and foster new business opportunities. After September 4, 2024, any non-competes (new or existing) will no longer be enforceable, with the exceptions listed above.

The FTC’s new ruling also requires companies to notify current AND former employees with existing non-compete agreements in writing that these agreements will no longer be in effect. The good news is that the Commission has provided model language in the final rule that employers can (and should) use to communicate with their workers. Click here, scroll down to the “Model Notices” section, and select the language(s) desired.

What now?

It should be noted that courts may still attempt to overrule the new regulations; however, it’s important to prepare to comply with this new rule in case it does go into effect. You can certainly delay implementing actual changes until just before the rule’s effective date; however, preparation now can lead to a smoother transition if the ruling does go into effect. 

That being said, if your company currently has non-compete agreements, you may want consider the following: 

• Develop the required notices to your employees (current and former) who are currently subject to the non-compete agreements. Reminder that the model notices can be found here and that the notices must be in writing.
• Decide if you’re going to continue to issue non-compete agreements to new hires for signature up until September 4, 2024 (the law’s effective date).
• Contact your legal counsel to review your existing non-compete agreements to assess their enforceability under the new rule.
• Update your employee handbook and policies to reflect changes in how you will handle proprietary information and business relationships.
• Review what items your company considers as trade secret or confidential information. Remember, non-disclosure and confidentiality agreements (which protect confidential information and trade secrets) are not affected by this new rule. 
• Be ready to talk about it. Prepare a talk track that can be referenced by HR, management, and executive staff. Communications should be consistent and accurate for all employees affected. 
• Develop a transition plan to phase out existing non-compete agreements in compliance with the new rule once (if) it is finalized. Consider who will issue the communications, how to triage questions, etc.

Finally… Stay. Informed. Keep updated with the progress of the FTC rule by monitoring official FTC announcements and consult legal resources. Of course, when we know more, we’ll update you as well.

If you have any questions on how to manage this new regulatory change, contact us at Cooper People Group! Our team of HR experts can help with this transition from mitigating risk, managing communications, answering questions, and even updating your handbook. 

Sources:

https://www.ftc.gov/legal-library/browse/rules/noncompete-rule