The FTC has issued its final rule banning non-compete agreements. The new rule goes into effect sometime later this year (120 days after publication in the Federal Register), although legal challenges are expected.
Here are some changes under the new rule:
- Employers may not enter into new non-compete agreements with their employees (or independent contractors) after the date the final rule goes into effect.
- Existing non-compete agreements will no longer be enforceable after the date the rule goes into effect, except those between “senior executives” (earning more than $151,164 per year and having policy-making authority) and the employer.
- No later than the rule’s effective date, employers must notify their workers that their existing non-compete agreements are no longer enforceable.
What does this mean for employers? The long-term effect is unclear.
First, we don’t yet know when (or if) the rule will actually go into effect. There are likely to be legal challenges before the effective date that could delay (or even prevent) its implementation.
Second, the FTC is a federal agency. Most states already have their own legislative or court interpretation regarding non-compete agreements. Some states ban non-compete agreements outright; others only allow them to apply if the worker earns over a certain dollar threshold. It seems likely that there will be legal challenges over whether the federal rule will preempt state laws.
In Michigan, employee non-compete agreements are only enforceable if they are reasonable in time, scope, and geographic area. Unless and until the FTC ban goes into effect or Michigan changes its own laws, the current Michigan interpretation is likely to stand for Michigan employees.
Given the uncertainty, we recommend considering non-solicitation provisions instead of (or in addition to) non-compete provisions. The FTC has indicated that non-solicitation provisions will remain enforceable, and the general national trend is favoring non-solicitation provisions over non-compete provisions as well.
The FTC rule would not invalidate agreements to protect trade secrets or confidential business information. It would also not invalidate a non-compete agreement made in connection with the sale of a business, in order to protect the buyer’s investment.
If you have any questions on how this rule may impact you or your business, the attorneys at Demorest Law Firm would be happy to help you.
