AUGUST 22, 2024 UPDATE: A federal judge has issued a nationwide injunction on the FTC’s total ban of non-competes previously set to go into effect on September 4, 2024.
Background:
In April of 2024, the Federal Trade Commission (FTC) issued a total ban on non-compete restrictions for individual workers set to go into effect on September 4, 2024. Under the ban, employers cannot enforce previous non-compete language (except for certain senior executives) nor can they enter into any new non-compete agreements with ANY workers (including senior executives).
On August 20, 2024, a Federal judge in Texas permanently enjoined the FTC from enforcing the ban against non-competes and issued a nationwide injunction that protects all US employers.
What are the Implications of the Injunction?
Until a final ruling is handed down in the courts, the FTC cannot enforce or impose sanctions on employers for not complying with the new total ban on non-competes. It can, however, still enforce the rule on a case-by-case basis for employers using non-compete clauses in an unfair or deceptive manner. For example, the FTC (and the Commonwealth of Virginia, for that matter) could impose sanctions on an employer who attempted to enforce a non-compete clause against a low-wage worker.
What Should You Do Next?
At this time:
- Employers DO NOT need to send out the nonenforcement of non-compete notices previously required under the new rule.
- Employers DO NOT need to remove non-compete language from company materials, including employment agreement templates, employee handbooks, onboarding and training materials, etc.
Because the injunction may be overturned:
- Employers who have already sent out the notice and updated materials should not rescind the notice.
- Employers should still make a plan and be prepared to send out the notice and update materials to remove non-compete language. This could include drafting the notice, making a list of workers who need to receive the notice, and making a list of materials that will need to be updated.
We will continue to keep you apprised with updates and actionable information as this new law makes it way through the courts.
As a Reminder…
Virginia already has a law on the books prohibiting non-compete clauses for certain low-wage workers. If any of your employment or independent contractor agreements include non-compete clauses, you should ensure that the clauses are in compliance with the existing Virginia law as they may still be enforceable despite what is happening at the federal level. In addition, Dunlap Law can help you develop other contract language to help protect your business interests and intellectual property that are not subject to the increasing scrutiny being placed on non-competes.
Below is our previous blog on the issue:
On September 4, 2024, a new ban on non-compete clauses goes into effect (note: an injunction is now in place).
Business owners MUST take certain actions BEFORE the September 4th effective date (note: an injunction is now in place).
Background:
In April of 2024, the Federal Trade Commission (FTC) issued a total ban on non-compete restrictions for individual workers. The ban’s purpose is to safeguard the fundamental freedom of people to switch jobs, stimulate innovation, encourage new startups and business ventures, and bring fresh ideas to the market. Beginning September 4, 2024, employers cannot enforce previous non-compete language (except for certain senior executives) nor can they enter into any new non-compete agreements with ANY workers (including senior executives).
Who Qualifies as a “Worker” Under the Rule?
The rule defines “worker” as “a natural person who works or 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.” Thus, the ban not only applies to current and former employees, but to anyone who may have provided a service to your business such as independent contractors, interns and the like.
What is a Non-Compete?
The FTC defines “non-compete” as: a term or condition of employment (including but not limited to a contractual term or workplace policy, whether written or oral) that:
- prohibits or penalizes a worker for seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition, and/or
- prevents a worker from operating a business in the United States after the conclusion of the employment that includes the term or condition.
The key thing to note from this definition is that the rule only applies to post-employment restrictions. In other words, businesses are still allowed to restrict the competitive activities of workers during the term of their service to such business.
What’s Required? (Note: An Injunction is Now in Place)
- Before the September 4, 2024 deadline, employers must notify previous and current workers in writing that their previous/existing non-compete clauses and/or contracts are no longer enforceable. The FTC provides a sample notice here. Employers are legally required to make reasonable efforts to notify previous and current workers in writing via email or mail that their non-compete is not enforceable. Employers must also document their efforts to provide this notice. Employers are only required to issue the notice in English, but the FTC provides translations of the notice into other languages and encourages businesses to distribute the notice in other languages to impacted workers.
- Employers must remove non-compete clauses and language from legal templates and forms, handbooks, orientation materials, and any other business materials. Note: Employers are not required to reissue amended versions of pre-existing agreements containing non-compete language – issuing the notice is sufficient for compliance. Rather, employers must remove the language from materials to ensure they do not enter into such agreements or imply the existence of such requirements beginning September 4, 2024.
While non-compete clauses are illegal as of September 4, 2024, employers should consult with an attorney to revise legal templates and forms to both remove the prohibited language and strengthen language around NDAs, trade secrets, non-solicitation and company property to better protect their business.
Are there Exemptions?
- Certain entities that fall outside of the jurisdiction of the FTC are not subject to the ban, including tribal entities, state and local governments, and some banks, hospitals, and nonprofits that meet certain criteria.
- Business owners may still include non-compete agreements as part of a bonafide sale of a business. For example, if Jane buys a mechanic shop from Tom, Jane may include language in the purchase agreement that Tom will not open another mechanic shop within a 20-mile radius for a period of 5 years after the sale.
- Employers are not required to rescind existing non-compete language for senior executives who meet certain criteria. Again, however, employers may not enter into new non-compete agreements with any employee moving forward. Employers should consult with an attorney to determine if any of their employees with existing non-compete agreements qualify as senior executives, and thus are exempt from the ban.
- Employers are not required to send written notice to previous employees for whom they do not have contact information. They must, however, attempt to send communications using whatever contact information they do have.
What are the Consequences for Noncompliance?
Employers who do not comply with the non-compete ban may face legal consequences at the federal, state, and civil level. Former or current employees may report noncompliance to legal authorities who may in turn commence enforcement actions, impose sanctions, and inflict penalties against businesses and their owners. Employees may also seek monetary damages by filing civil lawsuits against employers who attempt to enter into or enforce non-compete clauses.
What Should I Do Next? (Note: An Injunction is Now In Place)
Make a plan to comply with the requirements before the September 4th deadline, including:
- Compile a list of past and present workers who were/are subject to non-compete clauses as part of their service to your organization, including their last-known contact information (remember, “workers” applies to more than just your employees);
- Determine if any non-compete agreements with senior executives are exempt from the ban;
- Draft a non-enforcement notice using the FTC’s sample;
- Distribute the notice to the effected individuals;
- Document distribution efforts including a copy of the notice, to whom it was sent, via what method, and the individuals’ contact information.
- Work with an attorney to update your legal templates and forms to remove the prohibited language and strengthen protections of permissible language. If you’re an existing client, call or email your Dunlap Law attorney today to set up a consultation.
- Remove any and all references to non-compete language or requirements from other company materials such as handbooks and orientation materials.
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