FTC BANS EMPLOYMENT NON-COMPETES
On May 7, 2024, the Federal Trade Commission (FTC) published its new rule banning non-compete agreements for workers. The rule has been in the making for over a year. The FTC estimates that 1 in 5 American workers has signed a non-compete agreement.
The new rule takes effect September 4, 2024. As of that date, no new non-compete agreements may be entered with any employees.
Non-competes are agreements that prevent an employee from leaving to go work for a “competitor.” Often, though, “competitor” is defined broadly enough to seriously limit an employee’s ability to earn their living anywhere else. Employers may worry that an employee learns valuable information at their company, then jumps ship, using it to the employer’s detriment at another company or by starting up their own business doing the same thing.
Existing non-competes remain in force, but only until they expire on their own terms and only for “senior executives”. Senior executives are defined as employees in policy-making positions who earn more than $151,614 per year. After 9/4/2024, it will also be unlawful to extend or renew an existing non-compete with a senior executive. In North Carolina, an existing employee must be paid something extra (not just keeping their job) for signing, extending, or expanding a non-compete. Between now and 9/4/2024, employers can be expected to push hard to have senior executives agree to long extensions of their existing non-competes, but in North Carolina, employers are going to have to pay real money for the extension to be upheld in court.
Employers must send written notice by 9/4/2024 to all affected employees (all but senior executives) that the worker’s non-compete “will not be, and cannot legally be, enforced.”
Litigation is expected that may – or may not – delay the effective date. Everyone should act on the assumption that the rule will take effect on time unless and until there is a court ruling to the contrary.
What do I make of this change? I think it’s a story of a good thing gone bad. Non-compete agreements with a reasonable scope have a valid use with key employees. Over the years, though, employers overreached and abused their power. Employers began using them with ordinary employees without good reason. They also increased the scope of the agreements beyond what was really necessary to protect their business, which was punitive to employees. That set the stage for the FTC’s rule.
I believe the FTC went too far in banning limited-scope non-competes with key employees. The FTC noted that most employees subject to non-competes have also signed non-disclosure agreements (NDAs). The FTC felt that NDAs and trade secrets laws adequately protect employers without non-compete agreements. However, NDA and trade secrets claims are more nuanced and harder to prove than the more black-and-white noncompete agreements. The rule opens the door for key employees to cause real and unfair harm to a former employer’s business in ways that will be difficult to prove.
Non-competes will still be permitted between buyers and sellers of businesses. That is an entirely different use for non-competes. The FTC was not bothered by non-competes in that context because they are the result of negotiation between two businesses of relatively equal bargaining power. In the employment setting, bargaining power is often one-sided.
Kim K. Steffan is an attorney with Steffan & Associates, P.C. in Hillsborough. She can be reached at (919) 732-7300 or at kim.steffan@steffanlaw.com.