The Federal Trade Commission (FTC) creates uncertainty in the U.S. labor market with its recent announcement of a near-blanket ban on non-compete agreements. This bold move is intended to increase worker mobility and competition. The new rule is set to take effect in approximately 120 days, or around August 20, 2024. However, the FTC is expected to face legal challenges that could delay its effective date.
A Dramatic Shift in Worker Rights
Yesterday, April 23, 2024, the Federal Trade Commission announced its final ruling to prohibit most non-compete agreements in U.S. employment agreements. This rule will significantly restrict employers’ ability to enforce non-compete agreements, which traditionally prevent employees from working for competitors within a specific timeframe after leaving their jobs. The FTC rule will render preexisting non-compete agreements unenforceable, and employers will be barred from imposing non-competes on almost all workers, regardless of position or salary.
The sole exception applies to existing non-competes for senior executives – who represent less than 0.75% of U.S. workers – can remain in force under the FTC’s final rule. The FTC defines senior executives as those i) employees in a policy-making position and ii) with annualized compensation of over $151,164. Employers will be banned from entering into or attempting to enforce any new non-competes involving senior executives.
The Rationale Behind the Ban
The FTC’s decision stems from its belief that non-compete agreements stifle innovation and suppress wages. The Commission argues that by preventing employees from seeking better opportunities with competing firms, non-competes limit competition and worker bargaining power, particularly for low-wage workers who may be less able to negotiate their terms of employment. Studies have shown that non-compete agreements are used extensively, even in low-wage sectors like retail and food service, hindering worker mobility and wage growth.
The Looming Legal Battles
The FTC’s move has been met with opposition from the business community, with the U.S. Chamber of Commerce already announcing its intention to bring legal challenges against the rule and calling the FTC’s action an “illegal power grab.” Legal challenges are likely to focus on two key areas: the FTC’s authority and potential conflicts with state laws. Opponents argue that the FTC is overstepping its bounds by enacting such a sweeping rule.
What Should Employers Do?
The best anyone can do at this point is wait and see where any legal challenges take the new non-compete ban. It may be years before the FTC’s rule takes effect if legal challenges are successful in getting orders delaying the implementation or having the rule struck down permanently.
As a proactive step, employers can review the other provisions in their employment agreements making sure there is language that will ensure the other provisions of their agreements will stand if the non-compete language becomes unenforceable. Craft non-disclosure language and non-solicitation provisions so it is specific about the actual interests of the company and doesn’t extend to an overly broad de facto non-compete clause.
Employers can also reach out to their employment attorneys for assistance in drafting provisions that are expected to protect their interests and stand under any expected changes in the law.
With the evolving employment and labor law landscape, employers with questions or concerns are encouraged to contact the author, Mary Ellen Reihsen, Partner at Hellmuth and Johnson: [email protected] or 952-460-9275.
