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Loudoun County Attorneys > Blog > Business Law > The FTC Slams the Brakes on Non-Compete Agreements: What Employers Need to Know 

The FTC Slams the Brakes on Non-Compete Agreements: What Employers Need to Know 

Finger,Tapping,On,Non,Competition,Agreement

By Kyle Winey, Esq and Robert Showers, Esq 

In a landmark regulatory decision, the Federal Trade Commission (FTC) took a decisive step toward protecting worker mobility by banning most non-compete agreements. This ruling, effective 120 days after its publication in the Federal Register (likely around late summer 2024), significantly impacts employers’ ability to restrict employee movement after leaving a company. 

The ban on non-compete agreements marks a significant departure from traditional practices, sparking debates and discussions about its implications for both employers and employees. This article delves into the FTC’s ruling, explores its exceptions, and discusses the current implications for employers. Furthermore, it proposes solutions and recommends next steps for navigating this new regulatory environment. 

1. Understanding the FTC’s Ban on Non-Compete Agreements 

The FTC’s ban on non-compete agreements aims—in theory at least—to promote competition, innovation, and economic mobility by removing barriers that restrict employees from seeking better opportunities. Non-compete agreements typically prevent employees from working for competitors or starting their own businesses in the same industry for a specified period after leaving their current employer. While these agreements were originally intended to protect a company’s intellectual property and trade secrets, they have often been criticized for stifling employee mobility and innovation. 

Nevertheless, the FTC’s final rule prohibits employers from entering into new non-compete agreements with any worker, regardless of position or industry. This means employers can no longer restrict employees from taking similar jobs with competitors after their employment ends. This broad stroke aims to dismantle a system that, according to the FTC, has stifled worker mobility, suppressed wages, and hindered innovation.  

Under the rule, “non-compete” agreements are defined as any term or condition of employment that “prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment…; or (2) operating a business in the United States after the conclusion of the employment….” In short, this definition is extremely broad and comprehensive and arguably even includes prohibiting non-solicitation provisions, which are provisions limiting the poaching of an employer’s clients, even if non-solicitation provisions are not categorically prohibited under the rule. There are no exceptions for churches or religious entities. 

The FTC rule also applies to Training Repayment Agreement Provisions (“TRAPS”), which is a contractual provision requiring an employee to repay their employer the cost of training provided to the employee for the employee’s professional development.   

In addition, the FTC’s ban on non-compete agreements applies broadly to “business entities”, including limited liability companies (LLCs).  This means that under the FTC’s rule, LLCs generally cannot require their members (i.e., owners) to sign non-compete agreements. However, it’s unclear under the FTC’s rule whether non-compete agreements may apply upon the dissolution of the LLC or termination of a member’s interest. Some legal experts believe there might be an argument for an exception to the FTC’s rule when a member leaves the LLC. This exception could be similar to the one for senior executives in traditional employment situations (see below). The rationale behind this argument is that departing members might possess unique knowledge or access to sensitive information that could harm the LLC if they compete directly after leaving.  

Importantly, the rule requires that employers provide written notice to employees indicating that all existing non-compete agreements are unenforceable unless an exemption applies. The FTC requires specific verbiage in the notice.  

2. Exceptions to the Ruling: 

There are a few limited and narrow exemptions to the FTC’s rule, which are addressed below:  

  • “Senior Executive” Exemption. This exemption only applies to existing non-compete agreements with qualifying “senior executives. A “senior executive” is generally defined as an employee earning more than $151,164 annually1 and holding a “policy-making position.” However, employers cannot enforce non-compete agreements, even with this exemption, if the terms are deemed overly broad (e.g., geographically, time, scope of duties) or if the executive’s salary falls below the threshold upon renewal. To be clear, this exemption only applies to existing non-compete agreements, and employers cannot enter into new non-compete agreements with senior executives, even if their salary exceeds the threshold. 
  • Mergers and Acquisitions (M&A). There are two relevant topics here:  
    • Acquiring Existing Non-Compete Agreements. A crucial exception exists for situations involving mergers and acquisitions. When two companies combine, the acquiring company can enforce existing non-compete agreements with employees of the acquired company, provided the agreements were lawful under the original employer’s state law. However, the FTC emphasizes that this exception is limited to the existing agreements and does not allow the acquiring company to impose new non-compete agreements on the acquired company’s employees. 
    • Purchase and Sale Agreements. When a buyer buys a business, it often seeks to protect its interests by including non-compete clauses in the transaction agreements. These clauses, commonly known as or “seller non-competes,” typically prevent key employees from engaging in similar business activities that could compete with the acquiring company or harm the value of the business being sold. These seller non-competes are not prohibited by the new rule. In fact, the FTC declined to adopt commenters’ call for a 25% ownership test or monetary threshold for seller non-competes, instead opting for a more flexible exception for “bona fide sales.”  
  • Trade Secrets and Confidential Information. The FTC’s ban on non-compete agreements allows for the enforcement of agreements in cases involving the protection of trade secrets or confidential information. Employers may still utilize restrictions to prevent former employees from disclosing proprietary information to competitors or using trade secrets for personal gain. However, these agreements must be narrowly tailored to protect legitimate business interests and must not impose undue hardship on employees seeking to pursue alternative employment opportunities. 
  • Timing of cause of action and Effective date. When a cause of action related to a non-compete has accrued prior to the effective date of the rule, that will also be a limited exception to this broad rule against non-competes. 

Unless an applicable exemption exists, employers cannot enter into a new non-compete agreement with employees. Importantly, even if an applicable exemption exists, the non-compete provisions must be narrowly tailored and be lawful under traditional non-compete legal principles.  Moreover, the FTC ban on non-competes, assuming it goes into effect, would override current Virginia law regarding non-competes (Virginia has its own ban on non-competes for low wage earners, which is based on a moving salary threshold determined annually, and which as of January, 2024, was an annual salary of $73,320 (Virginia Code § 40.1-28.7:8)). 

3. Implications for Employers: Adapting to the New Reality 

The FTC’s ruling presents a new set of challenges for employers who previously relied on non-compete agreements. Here’s how this decision might impact your business: 

  • Increased Employee Mobility: Employees will have more freedom to pursue better opportunities, potentially leading to higher employee turnover in some sectors. 
  • Focus on Retention Strategies: With non-compete agreements out of the picture, employers need to invest in robust retention strategies. This could involve competitive compensation packages, fostering a positive work environment, and offering clear career development paths. 
  • Trade Secrets and Confidential Information: Employers can still protect trade secrets and confidential information through well-drafted confidentiality agreements and non-disclosure agreements (NDAs). These agreements should clearly outline what constitutes confidential information and the restrictions on how employees can use it after leaving the company. To be clear, as a result of the ruling, there will be a great emphasis on companies and organizations maintaining and enforcing robust NDAs.  
  • Focus on Training and Development: Investing in employee training and development becomes a more strategic move. By equipping employees with valuable, transferable skills, employers can make themselves more attractive workplaces and mitigate the risk of losing skilled workers to competitors. 

4. Recommended Next Steps for Employers 

While the FTC’s ruling presents challenges, it also offers an opportunity for employers to re-evaluate their talent management strategies. Here are some actionable steps to consider: 

  • Review Existing Agreements: Identify all existing non-compete agreements and assess their enforceability based on the new FTC rule. Notify employees (other than senior executives) that their non-compete agreements will no longer be enforced. 
  • Develop Strong Retention Strategies: Conduct a talent review and identify high-potential employees who might be at risk of leaving. Invest in competitive compensation and benefits packages, create a positive work culture, and offer clear pathways for growth and development. 
  • Draft Strong NDAs and Confidentiality Agreements: Focus on protecting your company’s true trade secrets and confidential information through well-defined NDAs and confidentiality agreements. 
  • Invest in Employee Training and Development: Equip your workforce with valuable skills applicable across various industries. This can boost employee engagement, satisfaction, and make your company a more attractive employer. 
  • Execute Non-Competes Now. The exact date of the FTC’s ban on non-compete agreements goes into effect is uncertain at this time. The final rule will be published in the Federal Register, and it will take effect 120 days after that publication. As a result, the rule is likely to go into effect around late summer 2024. Thus, employers could implement non-compete agreements prior to the enactment of this new rule. However, in deploying this strategy, it’s important to stay updated on the official publication date to ensure compliance. 
  • Non-solicitation and confidentiality and non-disclosure clauses.  There are other situations which might apply differently to each worker’s status and these should be evaluated on a case-by-case basis with an competent employment law attorney. The rule also does not appear to eliminate non-solicit, confidentiality and/or non-disclosure agreements between companies and their workers for now. 

5. Conclusion: A New Era   

It’s important to note that the legal landscape surrounding this specific scenario is still unclear. There haven’t been any court rulings yet that definitively address the applicability of the FTC’s rule to non-compete agreements between LLC members. Be sure, there will be extensive litigation on this issue, including the enforceability of this rule. Multiple legal challenges have already been filed by the U.S. Chamber of Commerce and other groups in Texas and in Pennsylvania; however, if the rule is not successfully blocked from going into effect, then companies or individuals who entered into non-competes with workers other than senior executives, must give notice to the worker by the effective date of the rule on September 4, 2024 that the non-compete will no longer be enforced. 

Nevertheless, the FTC’s ban on non-compete agreements marks a significant shift in the power dynamics between employers and employees. As a result, it is critical for employers, companies, organizations and other entities to seek legal counsel. Readers wanting to see the full rule in context can view all 570 pages here: https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf.  

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Disclaimer: This memorandum is provided for general information purposes only and is not a substitute for legal advice particular to your situation. No recipients of this memo should act or refrain from acting solely on the basis of this memorandum without seeking professional legal counsel. Simms Showers LLP expressly disclaims all liability relating to actions taken or not taken based solely on the content of this memorandum. Please contact Robert Showers at hrs@simmsshowerslaw.com or Kyle Winey at kdw@simmsshowers.com,  for specific legal advice on this issue for your needs. 

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