Now that the dust has settled on the Federal Trade Commission’s April 23 final rule that would prohibit virtually all employee noncompete agreements, where do things stand?
The rule is scheduled to take effect on Sept. 4 though several legal challenges or an act of Congress may delay it. But if the rule does take effect, it will make it illegal for for-profit businesses to require virtually any employees or contractors to sign noncompete agreements.
What does this mean for employers?
The rule defines a noncompete clause as a “term or condition of employment” that “prohibits,” “penalizes” or “functions to prevent” an employee from finding work with another employer after completing employment. According to the rule, the “term or condition of employment” can include a contractual term or workplace policy and doesn’t necessarily have to be written.
The FTC characterized noncompetes as “restrictive and exclusionary” and “exploitative and coercive.” The commission said that banning noncompete agreements will increase worker earnings by up to $488 billion over the next decade and will lead to the creation of more than 8,500 new businesses each year.
The rule does not ban nonsolicitation covenants, nondisclosure agreements, “garden leave” arrangements or training repayment agreements.
Who is affected?
The noncompete rule affects “workers” and “senior executives” differently. Existing noncompetes for senior executives – defined as employees with “policymaking positions” who make $151,164 or more a year – can remain in place after the rule goes into effect. But all other existing noncompete agreements between employers and workers who do not fit the senior executive criteria will be unenforceable as of the date of implementation.
After that date, employers cannot ink any new noncompete contracts, even with senior executives, though there are some exceptions. Noncompetes that bar employees from competing against their employer during their employment will still be allowed, as will noncompetes that follow the sale of a business entity, and noncompete agreements between a franchisee and franchisor.
In most cases, tax-exempt and charitable organizations will not be subject to the rule, but the FTC did state that a nonprofit corporation may be affected if it is “organized to carry on business for its own profit or that of its members.”
Currently, there are three lawsuits challenging the rule, all filed under similar grounds: the commission lacked the authority to appoint the rule, the rule is an unconstitutional use of legislative power, and/or the rule is “arbitrary and capricious.” A ruling on an emergency stay in one of the cases is due by July 3.
In addition to the lawsuits, the FTC rule may also be invalidated by congressional action because it addresses a “major question” with broad implications for the U.S. economy, which the U.S. Supreme Court has said agencies can only undertake with explicit authorization from Congress.
While the legal challenges to the rule may be successful, every business should still spend the coming months preparing for the implementation of the FTC rule.
A first step is identifying any restrictive covenants with employees that may be affected by the rule. Then a notice must be prepared to inform workers of the change. Lastly, consider the goals of your restrictive covenants and consider how those goals might be achieved in this new environment.
Despite the FTC rule, Rhode Island lawmakers took the matter into their own hands this spring, with both chambers of the General Assembly approving legislation to ban virtually all noncompete agreements in the state. However, the Rhode Island Noncompetition Agreement Act was vetoed by Gov. Daniel J. McKee who cited “valid concerns” of local businesses. It’s unclear whether legislators will override the vote.
Joshua A. Hawks-Ladds is co-chair of the labor, employment law and employee benefits department at the law firm Pullman & Comley LLC. He leads the South Kingstown office.
