The modern trend in the United States has been to restrict the power of employers to enter into noncompetition agreements with their employees. While some states, such as Massachusetts and California, have long imposed restrictions on these agreements, the federal government has recently entered into the discussion.
Last year, two different federal agencies enacted or proposed nationwide rulings that severely limited post-employment restrictions on employees. And last week, the Federal Trade Commission (FTC) went a step further, issuing a final ruling that bans post-employment noncompete agreements in nearly all situations. The rule further requires employers to affirmatively notify employees that existing noncompete agreements are no longer enforceable. The rule takes effect 120 days after publication.
It is widely expected that this new rule will be challenged in court, but employers should begin preparing for this new rule to take effect. Below are the specific provisions of the rule:
- Noncompete agreements with workers are void in most circumstances.
- “Workers” are broadly defined to include not only employees but also independent contractors, externs, interns, volunteers, apprentices, or sole proprietors.
- There are limited exemptions for existing noncompete agreements for senior executives (annual compensation exceeding $151,164 and the employee is in a “policy-making” position), franchisor/franchisee relationships, agreements incident to a bona fide sale of a business, or where cause of action accrued before the effective date.
- The rule applies only to post-employment noncompete agreements
- The ruling makes it an unfair method of competition to: (1) to enter or attempt to enter into a non-compete agreement; (2) to enforce or attempt to enforce a non-compete clause; or (3) to represent that the worker is subject to a non-compete clause.
- Effective date is 120 days after publication in the Federal Register.
- Employers must notify workers with existing noncompete agreements that these agreements are no longer enforceable.
- Reasonable confidentiality/nondisclosure agreements and nonsolicitation agreements are not affected, but where such agreements are overbroad/oppressive, they can be deemed a functional or de facto noncompete.
Given these recent developments, your business may be impacted. We encourage you to contact Young Basile’s Labor and Employment Department to discuss how and what revisions may be needed to your standard agreements and practices. The employment attorneys and counselors at Young Basile will continue to monitor these and other developments. As strategic advisors to the world’s most innovative companies, Young Basile has deep experience drafting, negotiating, and litigating restrictive covenant agreements relative to mission-critical employees. If you have any questions about this impending regulation, or how it will affect your existing employment documentation, please contact the employment attorneys and counselors at Young Basile.
