By now, you’ve likely heard the news: on April 23, 2024, the Federal Trade Commission finalized a rule banning most non-competes in employment agreements. This is a significant development with wide-reaching implications, and a challenge for most employers, potentially making it harder to protect investments in employees. Before making too many adjustments, however, it is important to note that the rule’s implementation has predictably encountered substantial resistance, and the future of non-compete agreements remains uncertain.
In this post, we provide an overview of the new rule, explore its enforcement prospects, and offer our recommendations for navigating the evolving legal landscape.
What does the new non-compete rule prohibit?
The final rule prohibits employers from enforcing any term or condition of employment that “prohibits a worker from, penalizes a worker for, or functions to prevent a worker from working after their current employment ends.” In other words, no more non-competes.
There are a few narrow exceptions. Non-competes with senior executives that existed before the rule became final will be grandfathered in (although no new agreements of this kind will be enforceable). Additionally, both current and new non-competes involved in the sale of a business and non-competes between franchisors and franchisees will be enforceable. Outside of these scenarios, the prohibition is broadly applicable in most employment situations and covers both employees and independent contractors alike.
When does the final non-compete rule go into effect?
Although the rule has been finalized, its effective date is delayed. It is currently scheduled to take effect 120 days after it was finalized and entered into the Federal Register. However, due to pending lawsuits challenging the rule, including one from the U.S. Chamber of Commerce, we expect the implementation to be stayed (formally paused) until these lawsuits are resolved. This legal process will likely push the rule’s implementation well beyond the initially prescribed 120 days. Depending on the outcome, the rule may never go into effect.
What should employers and employees do now pending the uncertainty of the new non-compete rule?
Given the prohibition’s delayed implementation and uncertainty surrounding the outcome of the legal challenges, we believe North Carolina employers—while keeping an eye out for any legal developments—should feel confident in continuing to enter into and maintain non-compete agreements under the current state regulations. If the rule is upheld, it will be much simpler for employers to comply at that time rather than to retroactively implement non-competes if the rule is struck down.
What will happen if the new non-compete rule withstands?
If all legal challenges are resolved and the rule survives as written, employers will only be able to retain non-competes with existing senior executives and enter into new non-competes within the parameters of the exceptions noted above (namely, in the sale of a business and between a franchisee and franchisor). For all other existing non-competes, employers will not need to formally rescind the non-compete but will be required to notify current and former employees that: 1) their non-competes are no longer enforceable and 2) the employer will not seek to enforce them.
How can employers best protect their investments in the future?
If the rule stands and non-compete agreements are banned, it is crucial for employers to remember there are alternative ways to still safeguard their interests. The ban does not extend to other valuable restrictions such as non-solicitation agreements barring an employee’s solicitation of other employees, vendors, clients, and customers. Additionally, confidentiality provisions remain unaffected. Moving forward, employers should ensure that their employment agreements include well-drafted clauses of this nature. However, they must be cautious, as overly restrictive clauses could be seen as de facto non-competes and may be unenforceable. Skufca Law can assist in drafting these provisions in a way that is both enforceable and protective of employers’ interests.
If you are an employer, we can answer your questions about non-competes and assist you in drafting employment agreements with enforceable protections, such as non-solicitation terms. Please don’t hesitate to contact us. Our Skufca Law team is here and ready to help you with your non-compete questions and needs.
UPDATE: On August 20, 2024, a Texas federal court held the rule to be unconstitutional, thus barring—perhaps forever–the rule’s implementation. The FTC is likely to appeal this decision to the Fifth Circuit Court of Appeals; however, if the appeal is unsuccessful, then the new rule as written will never go into effect. Any future nation-wide attempt to ban non-competes will have to come in the form of a new law or proposed rule that addresses the problems with the current rule.