FTC bans non-compete agreements

NEWS:  The Federal Trade Commission (FTC) issued a new regulation yesterday that will largely prohibit new non-compete agreements in employment and render most existing non-competes unenforceable.
 
A non-compete is an agreement by a worker not to engage in competition with the employer for a time after the worker’s employment ends. Some Wisconsin credit unions might include non-compete clauses in their contracts with certain employees.
 
Litigation over the FTC’s authority to issue the rule is virtually certain. However, unless a court issues an injunction to delay the rule, it will become effective 120 days after being published in the Federal Register. This means that its effective date will likely be at about the end of August 2024.
 
The FTC’s jurisdiction is limited to for-profit businesses, so the rule does not reach non-competes that a non-profit entity may have with its employees. The FTC generally does not hold jurisdiction over banks and federal credit unions under the Federal Trade Commission Act (15 U.S.C. 45(a)). However, it does have jurisdiction over state-chartered credit unions.
 
The new rule applies broadly, covering agreements between employers and employees, independent contractors, externs, interns, volunteers, apprentices, or anyone else “who provides a service to a client or customer.”
 
The rule contains several exceptions. Among them, existing non-competes (non-competes entered into before the final rule’s effective date) can remain in force for “senior executives” (corporate officers and employees in policy-making positions who earned at least $151,164 in the preceding year). This “grandfathers” existing non-competes for a small group of highly compensated employees. However, employers may not enter into non-competes with senior executives after the rule takes effect.
 
The rule requires employers to rescind all existing non-competes and provide notice of rescission by individualized communication to affected employees. The rule includes model language that an employer can use, giving the employer a “safe harbor” for compliance. The notices must be sent (by mail, email, text message, or hand delivery) before the effective date of the rule.
 
The FTC said it believes that non-competition agreements constitute unfair competition because they reduce competition in labor markets. The FTC estimates that about one in five American workers, or about 30 million people, are subject to non-competes. Releasing these workers is projected to help create more than 8,500 new businesses per year and drive innovation via 17,000 to 29,000 more annual patents over the next decade, the FTC said.
 
The commission also noted that employers concerned about protecting their investment have “several alternatives to non-competes,” such as trade secret laws and non-disclosure agreements covering proprietary and sensitive information.
 
“The Commission also finds that instead of using non-competes to lock in workers, employers that wish to retain employees can compete on the merits for the worker’s labor services by improving wages and working conditions,” the FTC wrote in a release. The rule does not ban non-solicitation or confidentiality covenants, unless those covenants are so broadly written that, for practical purposes, they function to prevent workers from working for another employer in the same field.