The federal government made a groundbreaking move by finalizing an official rule to ban all non-competition agreements between employers and employees.
With this rule, you will be prohibited from entering most new non-compete agreements and enforcing any existing ones, except for a small group of senior executives. Additionally, the law will require you to inform current and former workers that their non-compete agreements are no longer valid.
Although the rule won’t be in effect until August, it’s a good idea to start preparing now.
What Does Non-Compete and Senior Executives Mean?
A “non-competition agreement” is any condition or term of employment that prohibits, penalizes, or prevents an employee from accepting or seeking employment at another business or operating a small business. The FTC rule does not explicitly prohibit other forms of employer protection, such as non-solicitation agreements, employee non-recruitment, or confidentiality provisions. Instead, it’s stated that these provisions will still be valid as long as they don’t prevent someone from getting hired. However, this determination will be made on a case-by-case basis.
A senior executive is someone who earns more than $151,164 a year in policy-making positions. Enforcing and maintaining existing non-compete agreements for these higher-level employees is permissible.
FTC Concessions
In light of comments, the FTC made two announcements. First, there is no need to rescind. This means that you don’t need to formally rescind existing non-competes. Second, the final rule allows for non-competes during the bonafide sale of a business or sale of someone’s ownership interest.
Notice Requirement
Before the rule takes effect in August, employers must provide workers with a notice regarding the changes to the non-compete clause. The notice must be clear and conspicuous, provided digitally or on paper, and clear that workers are exempt if there is no record of their street address, email address, or mobile telephone number.
The Next Steps to Take
We can’t trust that the courts will block this rule, but it also might not be smart to invest extra money and time into resources only for compliance to get struck down. Therefore, it’s important to be smart and consider the following steps.
Have a Strategy Plan in Place
You will want to get legal counsel immediately to create a strategy plan. Consider the company size, the number of non-competes in place, risk tolerance levels, existing resources, and other factors that will be affected in the coming months.
Take Stock These Next Few Months
Regardless of high-risk tolerance, it’s still not a good idea to do nothing these next couple of months. Between now and August, take inventory of all existing restrictive covenant agreements. This includes bind former workers. Also, make sure to determine the “senior executive” workers.
Have Alternatives in Mind
Get together with company leaders and figure out whether the organization can protect the company’s interests with a less burdensome covenant. For example, a confidentiality provision or tailored customer non-solicitation could achieve the same goals with fewer risks.
Don’t Ignore other Covenants
It’s important to remember that the final rule doesn’t render other restrictive covenants unenforceable. Thus, review all non-solicitation, non-recruitment, non-servicing, and non-disclosure clauses.
Protect Your Trade Secrets
It is more important than ever to protect your trade secrets.
The FTC points out that trade secrets can be protected to mitigate the damage of removing non-compete agreements. You should be able to identify your trade secrets and ensure that you have the right policies and procedures to protect them. Access to trade secrets should be restricted only to those who need it. Also, employees should be trained on how to protect trade secrets from theft and how to handle them properly.