Beginning sometime after August 20, 2024, new noncompete agreements between employers and employees will no longer be allowed under a new FTC rule passed April 23, 2024.
In brief: After the rule becomes effective (not before August 20, 2024), new noncompete agreements are prohibited and most existing agreements cannot be enforced. The exception to enforcement is for senior executives – those existing noncompete agreements may continue to be enforced. In addition, employers must notify employees that the employer will not be seeking to enforce the agreement.
Prior to the new rule, about 1 in 5 workers were required to enter into noncompete agreements as a condition of employment. At a minimum, noncompete agreements prohibited the affected employee from working in the same field (sometimes, any field) in a defined geographic area during and after employment. The employee is bound to the employer – the employee cannot quit and find other employment without violating the agreement. If the employee is terminated by the employer, even without cause, the employee would have difficulty obtaining a job for which they are qualified due to the noncompete in place.
Beginning in August, employers can no longer require – or even ask – any employees to enter into noncompete agreements. Moreover, they cannot enforce the ones they already have, with a very narrow exception. Employees at most levels will be free to move to jobs they may enjoy more, that may pay more, or that have better benefits, including starting their own businesses.
The only exception will be existing noncompete agreements with senior executive employees. A senior executive employee is one making over $151,164 per year and involved in policy decisions or planning. If a senior executive employee is currently subject to a noncompete, the restriction is allowed to continue. However, no new noncompete agreements can be made after August 21, 2024, regardless of the employee’s level.
This sounds like a bigger blow to the employer than it really is. Some states have already passed legislation to prohibit noncompete agreements to some degree. California, Minnesota, North Dakota, Oklahoma and Washington DC have already banned noncompete agreements in most circumstances. Nine other states have established compensation floors below which Noncompetes cannot be used. And other states, like Utah, have curtailed the scope of the noncompete. In Utah, Noncompetes cannot be effective for more than one-year post-employment, and may only prevent competition within the least restrictive geographic area possible.
The restrictions by the states are a result of employer abuses having an adverse effect on the employees and the workforce in general, as well as competition and innovation. I was involved in one situation where the employee was prevented from working anywhere in the world, in any profession, for five years after employment terminated. I have seen noncompete agreements applied to skilled and unskilled trades as well as entry level positions earing minimum wage and having no access to company secrets and no ability to determine policy or direction. Basically, the trend was to make everyone sign one. There is no legitimate business interest that can justify those restrictions.
Not all is lost for the employer. Noncompetes were originally intended to allow an employer to share processes, methods, ideas, and strategic policies with employees without fear the employee would take them to a competitor or use the information to open employee’s own business. Employers may continue to use nondisclosure agreements to accomplish this goal. Nondisclosure agreements prohibit the employee from using or providing specific information obtained in the employer’s employ for the benefit of any other party, including the employee. They serve the same goal noncompete agreements were initially created to further.
If you need assistance with creating a nondisclosure agreement for your employees, or to discuss your rights as an employer under this new rule, please contact my office at 801-612-9299 for a consultation.