As we have previously reported, the Federal Trade Commission (“FTC”) issued a final rule in April that would prohibit employers from imposing or enforcing noncompete agreements or other similar provisions that would functionally or operationally prevent most workers from seeking or accepting employment or operating a business after their employment is terminated (the “Ban”). Litigation over the Ban immediately ensued. While we noted that one court in Texas has issued an injunction enjoining the FTC from enforcing the Ban, that decision limited the injunction only to the parties involved in that particular lawsuit and at least one other court has ruled that the FTC does have the authority to issue the Ban.
The Ban and all of its attendant requirements on employers is effective September 4, 2024. Unless a court issues a nationwide injunction before the end of the month, which remains possible and plausible, employers are going to be faced with a potentially long period of uncertainty about the Ban and what to do about agreements that are in place and when new employees are onboarded. Here are three things to consider during this uncertainty.
First, the Ban narrowly excepts existing agreements with “senior executives”. “Senior executives” are limited to employees in “policy-making positions” who earn more than $151,164 annually. The FTC rule defines “policy-making position” as a “business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.” While the Ban prohibits noncompetes formed with senior executives after September 4, 2024, the FTC does appear to permit enforcement of some non-compete agreements between an employer and a senior executive employee entered before the deadline. Employers are well advised to consider whether their senior executives are or should be subject to post-termination restrictions and get agreements shored up or signed before the Ban is made effective.
Second, employers should understand and appreciate the risks of entering into future noncompete agreements. Some employers provide substantial or valuable consideration to employees who sign noncompete agreements. Should the Ban (or other statutory prohibition) be upheld in the future, employers may lose the ability to enforce noncompete agreements and are unlikely to be able to claw back payments made to employees who signed noncompete agreements. Cautious employers will intentionally engage in an appropriate risk-benefit analysis before providing a substantial signing bonus to an employee entering into one of these Agreements.
Finally, the FTC requires that employers issue a mandatory notice no later than September 4, 2024 that informs current and former employees who are subject to existing noncompete clauses that the noncompete clause will not be, and cannot legally be, enforced. With uncertain legal outcomes and this deadline looming, employers may want to prepare (but not issue) notices that would go out to current and former employees that complies with this requirement. The FTC’s model language for a notice can be found at https://www.ftc.gov/system/files/ftc_gov/documents/English.docx. However, we recommend a few modifications or additions to this notice:
- Presuming that an employee is subject to valid nonsolicit or nondisclosure agreements, the notice should include an addition that the Ban does not affect any other provisions or clauses in agreements with the employer, or other terms or conditions of their employment.
- The notice could include a provision that the Ban does not apply to existing agreements with senior executives or other positions specifically not encompassed under the FTC Ban.
- Employers should consider a provision that if the FTC rule is enjoined or determined to be unenforceable, any non-compete provisions subject to this notice will remain in effect, and this notice is void.
