By E. Drew Nelson, Attorney
The US Federal Trade Commission issued a rule that effective September 4, 2024, most non-compete clauses in the US are no longer enforceable. This means if, in the past, an employer required all new employees to sign a non-compete document, it is no longer valid (with the exception of senior executives*). In addition, employers may not require any new employee (including senior executives) to sign a non-compete.
What is a non-compete clause?
A non-compete clause is a document some employers have required employees to sign either before or during employment that typically prevents them from working for other companies in the same industry for a stated time period and area. Some employers have limited non-competes – for example, they may list two primary competitors and say an employee cannot leave and go to work for those companies within a one-year period. Other non-competes are extremely restrictive and may prevent an individual from finding a new job in their industry or within a geographic area, meaning the person might have to move to find employment. Note that not all employers label non-compete clauses with that wording, but if there is language in the employment agreement that has the same result, it is considered a non-compete clause.
Why was this new rule enacted?
The intent of the new rule is to ensure fairness in employment and prevent restrictions that result in former employees being unable to find work or start a business. No other terms of employment are impacted. This means that if an employee signed a non-disclosure agreement, confidentiality agreement, non-solicitation, non-piracy, or a similar document, those agreements are still enforceable. As an example, if an employee who had initially signed a non-compete agreement leaves your company and goes to work for a competitor on or after 9/4/24, you cannot take any action against that former employee to enforce the old non-compete. If the employee also signed a non-disclosure agreement and you discover they have revealed trade secrets, you could enforce the non-disclosure agreement.
Steps employers need to take before 9/4/24
Prior to the September 4 effective date, employers MUST take the following actions:
- Notify all current employees with non-competes that those agreements are no longer enforceable. [You may find it easier to send an email to all employees] You should also make an effort to notify past employees with non-competes, when possible. This is limited to those within the previously enforceable timeline (i.e., if the non-compete was valid for one year, then only notify those who left your employ within the past year) and those for whom you have contact information.
- Make sure employment agreements, employee handbooks, workplace policies, websites, and other documents are updated to remove references to non-compete agreements.
- Do not attempt to enforce any non-compete agreements after the 9/4/24 effective date. If the non-compete agreement was breached prior to 9/4/24, you may still take legal action to enforce the agreement.
- While you do not have to notify senior executives* whose non-competes are still in effect, you may wish to confirm these changes with them so there is no confusion.
*Based on this new rule, senior executives are those earning more than $151,164 per year in compensation, including salary, commissions, performance bonuses, and other agreed upon and expected compensation. These individuals must also be in management or policy making positions.
Failure to notify employees could result in fines or penalties.
Non-Competes still valid in the sale of a business
These rules do not affect non-competes related to the owners of a business who are selling out. It is still a vitally important part of any acquisition of a business to consider these in an effort to protect the value of the business you are acquiring.
If you have questions about the new regulation, contact Brinkley Walser Stoner today to schedule an appointment with a business law attorney to discuss your specific situation.