Recently, the Federal Trade Commission (FTC) announced that non-compete clauses would no longer be allowed. The FTC non-compete update goes into effect on September 4, 2024.
Thanks to the new FTC ban, employers may want to know, “Are non-compete clauses enforceable?” If you’re new to this kind of legal contract, you may also be curious about the answer to, “What is a non compete agreement?” Fortunately, this ban is fairly straightforward. Most classes of employers are covered.
It’s important to prepare for the ban as early as possible because employers have been given less than 135 days to get ready. Other than reviewing your current agreements, you should figure out how you will manage employee retention in the future and comply with the notification requirements.
What Is a Non-Compete Agreement?
First, what is a non-compete agreement? More importantly, are non-compete clauses enforceable?
A non-compete agreement is essentially a contract that prevents employers from taking on new positions at similar places of employment. For instance, a non-compete agreement may stop a doctor at a family medical center from taking on a similar role within a one-year timeframe.
One of the biggest reasons for the FTC non-compete update is because non-compete clauses have been abused in the past. For instance, retail and fast food jobs have routinely used non-compete contracts to prevent low-wage workers from going to other places of employment.
In addition to stopping workers from going to new job opportunities, non-compete contracts have stifled innovation by preventing workers from using their industry knowledge to start new businesses. The FTC estimates that the new ban will stimulate more than 8,500 startups each year.
The FTC believes non-compete agreements previously stifled competition for workers and prevented employees from taking better opportunities. Because of this, this government agency expects the FTC non-compete update will increase wages, decrease healthcare costs, and boost the number of patent applications each year. In fact, the FTC estimates that non-compete contracts have artificially reduced the average worker’s wages by $524 per year.
Is the FTC Banning Non-Competes?
Yes, the FTC is banning non-compete contracts. Even clauses in other contracts may be prohibited if they resemble a non-compete clause. For instance, you can’t have a non-solicit agreement over an entire geographic area because it would be so broad that it functions as a non-compete clause in practice.
The FTC non compete update will go into effect on September 4, 2024. There isn’t a lot of time to prepare for this major change, so it’s important to get started as early as possible.
How the Ban Works
Are non-compete clauses enforceable after the ban? If the worker was subject to a non-compete contract and violated it before the ban started, you can legally pursue them before or after the ban begins. You aren’t allowed to go after employees if they committed the violation after the ban starts because you should no longer have any non-compete contracts in effect.
One important thing to remember about the non-compete ban is that you have an assertive obligation to notify workers that their non-compete contracts are no longer valid. This applies to previous workers if they still have non-compete contracts in effect.
Fortunately, the FTC has been lenient about how the notification can take place. You can easily email or mail workers about the change. In fact, the FTC has even explicitly said that texts count as a notification.
Exceptions to the Ban
Other than learning the answer to, “What is a non-compete agreement?”, it’s also important to learn how the ban will go into effect. As a general rule, all non-compete contracts are banned. However, there are a few limited exceptions to this rule.
Senior Executives: Senior executives are also banned from signing non-compete agreements after September 4, 2024. However, they can still be held to any non-compete contracts they signed before this date. To be considered a senior executive, they must earn at least $151,164 per year and make policy decisions at your company.
Enforcement of Prior Contracts: While you can’t continue to enforce old non-competes after the cutoff date, you can go after anyone who violated a non-compete contract prior to September 4, 2024.
Franchises: Because the franchisee-franchisor relationship is unique, this specific relationship is not bound by non-compete rules.
Sales of a Business: If you buy a company, you can still give the owner a non-compete contract. The FTC has even updated this rule to include owners who possess any percentage of the company, so this specific exception has actually become broader and gained new contract options.
Are Non-Compete Clauses Enforceable?
After the ban goes into place, are non-compete clauses enforceable anymore? The answer to this question really depends on the exact circumstances and timing. Only some non-compete clauses will remain enforceable after the ban.
Prior to September 4, 2024
Before the ban goes into effect, you may enforce your non-compete clauses. While you do have to notify workers about the FTC non-competei update, you’re still allowed to enforce all non-compete contracts until the ban officially begins.
After September 4, 2024
Following the start of the ban, new non-compete contracts can’t be entered into unless they are one of the specific exceptions discussed previously. Barring the specific exceptions mentioned before, you may also no longer enforce your old non-compete contracts. However, you can go after workers who violated non-compete contracts before the ban went into effect.
Discover Ways to Navigate 2024 Changes in Non-Compete Agreements
What is a non-compete agreement? Are non-compete clauses enforceable? As an employer, there are many potential benefits to using non-compete contracts. However, the FTC non-compete update means that you’ll need to find new ways to retain workers because these contracts are no longer allowed.
To comply with the FTC’s update, businesses will need to send out notifications to current and former employers. Additionally, you’ll also need to revamp the way you boost worker retention. For more information about non-competes and your compliance options, reach out to our small business HR and payroll experts today.