Ian C. Perry Non-compete Agreements: No longer enforceable
On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule. This rule promoted competition by banning non-competes nationwide to protect the fundamental freedom of workers to change jobs, foster new business formation, and increase innovation. The FTC estimates that business formation will increase by 2.7% per year. This ruling is also expected to increase wages for workers and lower healthcare costs over the next decade. Along with this, the FTC believes innovation will be increased, leading to an estimated average increase of 17,000 to 29,000 more patents
each year.
What exactly are non-compete agreements? A non-compete agreement is a clause in a contract specifying that an employee must not enter into competition with another employer after the employment period is over. These agreements can also prohibit the employee from revealing proprietary information or secrets to any other parties during or after their employment. Most of these contracts specify a certain length of time when the employee is barred from working for a competitor or becoming a competitor after they end their employment. Those required to sign these agreements may include employees, consultants, and contractors. Some components you may see in a noncompete agreement are:
- Duration
- Geography
- Scope
- Competitors
- Damages
Many businesses use noncompete agreements to protect their intellectual property, proprietary information, trade secrets, and/or the production of their goods and services to maintain a competitive advantage. For example, an ex-employee who is not under contract with a non-compete could legally use the information they obtained at one company to help a new employer gain an advantage. That same employee may even start their own business using the information acquired from their employment. Some of the most common industries that use noncompete agreements are:
- Media
- Financial Services
- Corporate Management
- Manufacturing
- Information Technology
Under FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rules’ effective date, September 4, 2024. Employers will be required to notify workers other than Senior Executives who are bound by an existing non-compete that they will not be enforcing the agreements against them.
Under the FTC’s final rule, existing noncompetes with Senior Executives, who represent less than 0.75% of the workforce, can remain in force. Employers are banned from entering or attempting to enforce any new noncompetes, even if they involve senior executives. Who qualifies as a Senior Executive? Anyone who earns more than $151,164 per year and is involved in a “policy-making decision” is classified as a Senior Executive.
There are a few exceptions to the new ruling outside of Senior Executives. The non-compete ban does not apply to nonprofit organizations and industries not covered by the Federal Trade Commission Act, such as banks, savings-and-loan institutions, federal credit unions, common transportation carriers, air carriers, and any individual or business subject to the Packers and Stockyard Act. Along with this, the rule does not apply to noncompetes that are part of a corporate acquisition or sale of business interests. The final rule defines such transactions as “a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all substantially all of a business entity’s operating assets.”
With noncompetes being rendered unenforceable, companies will look into alternatives to protect their business. Trade secret laws and non-disclosure agreements (NDAs) both can provide employers with well-established means to protect proprietary and other sensitive information. Many researchers estimate that over 95% of workers with a noncompete already have an NDA. The FTC also recommends that instead of using noncompetes to lock in workers, employers that wish to retain employees can compete on the merits of the worker’s labor services by improving wages and working conditions
About the Author:
The Center for Financial, Legal & Tax Planning, Inc. (The Center), our M&A team, is equipped with attorneys and CPAs who are knowledgeable within the world of non-competes and corporate agreements. If you have any questions regarding the new non-compete ruling, please feel free to reach out at our website, www.taxplanning.com, or by phone at 618 997-3436.
