What to Know About the New Non-Compete Ban

Quick look: The Federal Trade Commission recently announced a monumental change to the U.S. non-compete landscape: the clauses will be banned or severely limited in most employment contracts across the country. To prepare for the upcoming changes, employers must now review their policies and determine what changes they’ll need to make to remain compliant with the new rule. Here’s what they should look out for and how a professional employer organization (PEO) can help.

Big changes are coming to the legality of using non-compete agreements for U.S. employers.

In April 2024, the FTC issued a final rule banning or severely limiting the usage of non-competes in most employment contracts nationwide. The new legislation follows President Joe Biden’s July 2021 executive order asking the FTC to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

Employers should review their current non-compete agreements or policies and prepare for the upcoming changes and compliance. Here’s an overview of the new rule and some useful tips to consider.

What is a non-compete agreement?

A non-compete agreement, or non-compete clause, is a contract preventing employees from working for competitors in a specific geographic area or industry for a limited amount of time after their employment is over. Employers generally use non-competes to protect their proprietary information and minimize the risk of future litigation.

An estimated 30 million workers—approximately 18% of U.S. employees—are subject to non-compete agreements.

An overview of the latest non-compete legislation update

The FTC’s new final rule states that existing non-compete clauses for most workers will no longer be enforceable after the rule’s effective date, which will occur 120 days after the date of its publication in the Federal Register.

Existing non-competes for senior executives (defined as policymakers who make at least $151,164 per year and comprise less than 0.75% of workers) can remain active under the new rule. However, employers are banned from entering or attempting to enforce new non-competes, even if they involve senior executives. Additionally, it will be mandatory for employers to provide notice to non-senior executive workers bound by an existing non-compete that they will no longer be enforcing any non-competes against them.

The FTC’s new rule aims to:

• Create more than 8,500 new businesses each year.
• Help workers earn higher wages, with estimated earnings for the average employee increasing by $524 per year.
• Reduce health care costs by up to $194 billion over the next 10 years.
• Boost innovation, with an estimated average increase of 17,000 to 29,000 more patents annually for the next decade following the rule’s enactment.

Click here to review the full FTC policy >

State legislature for non-competes

The regulation of non-competes has historically been left to the state level, many of which have been busy changing legislations of their own—and those laws vary significantly. It’s expected that the new national ban will go before the Supreme Court, and until it takes effect, employers should pay close attention to the applicable laws in the states they operate.

For example, California, Colorado, Minnesota, North Dakota, and Oklahoma have banned non-competes in most circumstances. Meanwhile, Massachusetts only bans non-competes for certain professions, including broadcast industry workers, doctors, lawyers, nurses, psychologists, and social workers. A handful of other states have passed laws restricting the use of non-compete agreements under certain stipulations or for lower-wage earners, such as:

Illinois: Prohibits employers from entering into non-compete agreements with employees who earn $75,000 per year or less and prohibits employers from entering into non-solicitation agreements with employees who earn $45,000 per year or less.

Nevada: Effective October 1, 2021, a non-compete agreement no longer applies to an employee who is paid solely on an hourly wage basis, exclusive of tips or gratuities.

Oregon: Employers are required to limit the restrictions in non-competes to 12 months after termination. The law also prohibits employers from enforcing non-competes against employees who are classified as non-exempt, and/or earn $100,533 or less per year, unless the employer has agreed in writing to pay the employee during the post-termination restricted period.

Washington, D.C.: A near-total ban on the use of non-compete agreements which prohibits employers from imposing non-competes on most District workers earning under $150,000 annually. Staff who earn over $150,000 can be subject to a one-year non-compete clause, but only if the employee is notified beforehand, except for medical specialists earning over $250,000 per year, who can be subject to a two-year non-compete.

Please note that the legal rulings mentioned are current as of April 2024 and may change at any time. For detailed and specific information, please refer to the legal guidelines of your state or consult with your legal counsel.

Prepare to comply

It’s important for business leaders to review their current agreements and practices to determine which non-compete laws apply to their locations, as these new changes could significantly affect how they draft employment agreements moving forward.

The enforcement of this rule will require many organizations to revise their existing employment contracts to remain compliant. Employers are also encouraged to explore alternative methods for protecting their business interests, such as non-disclosure agreements (NDAs) and non-solicitation agreements, which are not affected by this rule (but may be covered under state legislation).

Employers should consult their legal counsel or the compliance experts at their professional employer organization (PEO) for help. The professionals at a PEO can:

• Offer guidance on how to revise or craft non-compete agreements—when and where applicable
• Ensure compliant company policies whether a position is salaried, exempt, or hourly non-exempt
• Provide expertise for hiring, pay equity, time and labor, and more
• Offer alternatives to non-competes, like confidentiality agreements
• Protect your business from liability or exposure to costly penalties when applicable
• Revise company policies, update related employment documentation, assist with questions or concerns, and make recommendations for how to handle issues related to non-compete and other employment agreements

Useful tips for employers

Do you understand how your non-compete agreements may need to change to maintain compliance with the FTC’s upcoming rule? If you’re unsure, use these tips to help you avoid any pitfalls while also not restricting employee mobility.

Carefully review and craft agreements: Regularly review your non-compete contracts with your legal counsel to ensure they are compliant, meet necessary requirements, and do not contain any unreasonable restrictions. Then, review the non-compete agreements of current positions and determine whether to make any changes. Additionally, employers should work to ensure their non-competes are equitable across all demographic categories, including gender and race.

Until the nationwide ban takes effect, check if a non-compete is enforceable in your state: Remember, even before the FTC’s new rule materializes, different states have different rules regarding non-compete agreements. Leverage your PEO partner or legal counsel for guidance on staying up to date with your state’s rapidly changing laws and regulations.

Determine who needs to sign a non-compete: Not all employees need to sign a non-compete agreement, so consider writing specific agreements for certain key employees instead. For example, employees who do not deal directly with trade secrets, clients, or financials likely do not need to sign a non-compete. The same may not apply to a C-level executive or high-performing sales representative. Be sure to consider how the segment of staff who qualify for a non-compete will narrow under the new rule.

Establish what you need to protect: For employees who may still be subject to a non-compete clause after the latest legislation takes effect, decide which restrictions must be in place to protect your business interests. It may not be enough to simply say that your former employees can’t work for your competitors; you should clearly define what work and activities they cannot perform. Use industry, business, and employee-specific parameters. But remember, excessive restrictions likely will not be enforceable.

Define geographic limitations and reasonable time: Most non-compete agreements operate within geographic and time constraints. If you’re a regional organization, your non-compete likely can only extend to some of the country, especially once the FTC’s new rule becomes active. It can, however, certainly include the area where you conduct business. Time limitations can be trickier, but best practice is usually no more than two years.

Conduct exit interviews: Remind applicable employees during their exit interview that they do have a non-compete agreement in place and may need to review the contract to avoid future legal implications.

Evolving non-compete legislation can be complicated, but you’re not alone

Major change is coming to non-compete agreements on a federal level. Now is the time for employers to evaluate how the upcoming legal changes may impact their current contracts. Experienced professionals at a PEO can assist in maintaining non-compete agreement compliance in a way that strikes a healthy balance between protecting your business interests and employees.

Do you need help preparing your policies for the upcoming national non-compete ban? ExtensisHR’s compliance experts are here to answer your questions—contact us today to get started.