According to the new and (final) rule restrictive covenants prohibiting competition (i.e. non-competition clauses) are an unfair method of competition. It is anticipated some (not all) corporate trade groups, such as the chamber of commerce will challenge this rule. Companies that are innovating and seeking experienced labor are going to thrive under this new rule. On the other hand, there is a certain class of work place that is threading water currently, and retain employees by threat, these employers are likely going to struggle to reinvent the corporate culture under this new rule.
Employers.
The Federal Trade Commission (FTC) has made a significant move toward enhancing worker mobility and fostering a more dynamic economy by finalizing a rule that bans noncompete agreements nationwide. This decision, was passed with a narrow 3-2 vote. It marks a pivotal shift in employment law, which aims to protect corporate rights to hire whomever they wish, as well as permit employees start new ventures freely. Set to take effect in 120 days from its publication in the Federal Register, this rule is expected to reshape the landscape of workforce management and competitive practices across various industries.
The Federal Trade Commission’s decision to eliminate noncompete agreements comes after a meticulous review of their impact on the labor market and broader economic implications. Historically, these clauses have been criticized for stifling competition and innovation by limiting workers’ (particularly experienced workers) ability to move freely between jobs. In industries ranging from technology to healthcare, noncompetes regularly prevent employers from hiring skilled and experienced workers, which suppresses innovation and profitability.
Under the new rule, noncompete clauses are deemed an unfair method of competition pursuant to Section 5 of the FTC Act. Employers, particularly those in sectors where competition for skilled labor is intense, are soon to be free to attract and retain talent. And the inability to enforce noncompete agreements will likely lead to a greater emphasis on creating attractive employment packages and fostering workplace environments that encourage long-term commitment from employees. This could include everything from offering better professional development opportunities to enhancing workplace benefits and improving company culture.
Senior Executives.
Despite the sweeping ban on noncompete agreements, the FTC’s rule makes a notable exemption. According to the new rule, existing non-competes with senior executives can remain in force. This group, defined by specific income thresholds (~151k) and roles (final authority) within an organization, will still be subject to existing noncompete clauses under certain conditions. The rationale for this exemption lies in the unique position these executives hold, often having access to critical strategic information and influential in shaping the company’s direction and competitive strategies..
However, even for senior executives, the implementation of noncompete agreements will face stricter scrutiny. New noncompetes cannot be established under the rule, and only pre-existing agreements are allowed to persist. This approach aims to balance the protection of business interests with the promotion of fair employment practices. As companies navigate this regulatory environment, they will likely focus on strengthening other aspects of employment contracts and incentives to ensure loyalty and retention of their top executives, aligning closely with the rule’s broader goal of fostering a competitive and innovative business landscape.
Conclusion.
As the FTC’s new rule on noncompete agreements takes effect, corporations stand to gain significantly from a revitalized hiring landscape. Freed from the constraints of noncompete clauses, employers can now recruit seasoned talent without the looming threat of legal repercussions against prospective employees. This not only broadens the pool of available talent but also places a positive onus on employers to foster a work environment that naturally encourages loyalty and retention. Companies are further incentivized to invest in their workforce through enhanced benefits, opportunities for advancement, and a collaborative culture that values each employee’s contribution. By shifting from a restrictive, punitive approach to one that emphasizes mutual growth and respect, businesses are likely to see not just a more stable and committed workforce, but also an overall increase in innovation and competitive edge. This new rule not only liberates workers but also empowers employers to build stronger, more agile teams that can thrive in an open market.
Final Comment: It appears as though any pending litigation about this subject matter will likely not be dismissed as the cause of action accrued prior to the date this rule becomes effective.
Excerpt Definitions:
Section 910.1 defines
a non-compete clause as a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from
(A) seeking or accepting work in the United States with a different person (employer) where such work would begin after the conclusion of the employment that includes the term or condition; or
(B) operating a business in the United States after the conclusion of the employment that includes the term or condition.
a Worker means a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person. The term worker includes a natural person who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship.
a Senior executive means a worker who:
(1) Was in a policy-making position; and
(2) Received from a person for the employment:
(i) Total annual compensation of at least $151,164 in the preceding year; or
(ii) Total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year; or
(iii) Total compensation of at least $151,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause.
a Policy-making position means a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority. An officer of a subsidiary or affiliate of a business entity that is part of a common enterprise who has policy-making authority for the common enterprise may be deemed to have a policy-making position for purposes of this paragraph. A natural person who does not have policy-making authority over a common enterprise may not be deemed to have a policy-making position even if the person has policy-making authority over a subsidiary or affiliate of a business entity that is part of the common enterprise.
Policy-making authority means final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise.
