The employment law landscape is undergoing a significant shift with the Federal Trade Commission’s new rule on noncompete agreements, initially proposed in January 2023.
At its core, a noncompete clause is a contractual provision between an employer and a worker that restricts the worker from engaging in certain competitive activities during and after their employment, typically within a specified geographic area and timeframe.
The FTC’s new rule represents a substantial departure from the status quo in most states, as it will prohibit employers from entering into noncompete agreements with their workers.
Though already subject to multiple legal challenges, the final rule is scheduled to take effect on Sept. 4, 2024.
Understanding the implications of the rule and its timeline is essential for both employers and employees.
Once effective, the final rule prohibits all new employee noncompete agreements regardless of role or compensation.
Whether existing noncompetes remain enforceable turns on a key aspect of the rule — its distinction between “senior executives” and “other workers.”
Existing noncompete agreements for the former, defined in part as individuals in policy-making positions who meet certain compensation thresholds, remain enforceable under the new rule. However, for other workers, existing noncompetes will become unenforceable.
A senior executive, as defined by the FTC’s new rule, is multifaceted, encompassing individuals who have held a policy-making role and received compensation meeting specific thresholds for their employment, including:
These criteria, among others outlined in the final rule, distinguish between designations and determine whether existing noncompete agreements are enforceable under the new regulatory framework.
The scope of this new rule by the FTC does not include noncompete agreements in some contexts beyond employer-employee relationships.
It is important to note that the final rule permits noncompete agreements between franchisees and franchisors.
Additionally, it does not forbid noncompete agreements entered into as part of bona fide business acquisition.
Similar restrictions often found in employment agreements such as the nonsolicitation of customers or other employees are not affected by this rule.
The FTC rule resembles recent legislative efforts in California to prohibit noncompetition clauses for employees. A state known for its labor-friendly approach to employment law, California’s courts previously invalidated most employee noncompetition agreements.
Though noncompetition agreements have generally been disfavored by courts nationwide, the convergence of federal and some state-level initiatives underscores a trend towards greater restriction of employee noncompete agreements.
The FTC believes its approach reflects an effort to balance the interests of employers and employees while addressing concerns about unfair competition and labor market dynamics.
However, the rule’s implementation has not been without controversy. Even before its effective date, the rule has faced legal challenges, with multiple lawsuits filed in federal court seeking to block its enforcement.
Notably, the U.S. Chamber of Commerce raised concerns about the rule’s potential impact on business operations and competitiveness.
However, a federal judge has since paused this litigation due to a similar lawsuit being filed just one day prior.
These legal battles highlight the competing interests surrounding the regulation of noncompete agreements and the broader implications for businesses, workers and the economy.
As the legal landscape continues to evolve, employers must navigate these adjustments thoughtfully and proactively.
These impending changes underscore the need for clear communication.
For instance, the rule requires employers to provide affected workers with notice if their noncompete agreement is no longer enforceable.
Employers should take steps to revise employment contracts and hiring practices accordingly.
By staying informed and adapting to regulatory developments, businesses can mitigate legal risks amid evolving employment standards.
This column was written by Jacob Swatley and originally appeared in The Daily Memphian.
