The Rule.
As you may have heard, on Tuesday, the Federal Trade Commission published the Non-Compete Rule prohibiting entry, threat of enforcement, and enforcement of non-compete agreements with all employees and contractors except for existing agreements with ‘Senior Executives.’
The rule also requires employers with existing employee or contractor non-compete agreements to provide written notice to those employees (present and former) by August 20, 2024 (120 days after the publication date) stating that the non-compete won’t be enforced. It provides a form of notice that may be used.
Key things to know about the rule:
- The definition of non-compete is quite broad and includes any clause that prohibits, penalizes, or functions to prevent an employee from working for someone else or operating a business after employment.
- The prohibition applies to employees and contractors (defined as “workers” in the rule).
- In its more than 500-page supplementary information document for the rule, the FTC states that whether a clause violates the rule will depend on the facts and circumstances of the particular case, including the business market context. In other words, there’s no “bright line” test for a non-compete so employers must be careful about agreements that might fall into the non-compete realm.
- The rule doesn’t specifically prohibit:
- non-disclosure/confidentiality (NDA) agreements,
- non-solicitation/ non-acceptance clauses,
- training-repayment arrangement clauses, or
- no-hire clauses.
- However, the language of those agreements must not be so broad that it effectively functions as a non-compete.
- An NDA would be a prohibited non-compete where it included as confidential any general training, knowledge, skill, or experience, or information that is readily available to the public. The scope of the information that is protected must be narrowly tailored to confidential and proprietary information of your business.
- A non-solicitation/ non-acceptance clause would be a prohibited non-compete where it sought to restrain an employee or contractor beyond existing customer relationships, such as, for example, where a former customer hadn’t done business with the employer for a few years or a prospect list where only general marketing had occurred. A very conservative approach would be to make it applicable only to the employer’s customers with whom the employee has dealings.
- A training-repayment arrangement clause would be a prohibited non-compete where the cost to be repaid exceeded the reasonable costs of the employee’s or contractor’s training. Be careful about including general overhead expenses in those costs.
- The rule does not apply to business sales.
The Unintended Consequences of the Rule on Business Sales:
Even though it technically doesn’t apply to business sales, it will have an effect when a former owner goes to work for the buyer post-closing.
Before the rule, we would typically have a former owner going to work for the buyer enter two non-compete agreements at closing, one being a stand-alone non-compete and the other being a non-compete clause in the post-closing employment agreement.
The stand-alone agreement would burn off starting at the closing. The employment clause, on the other hand, would only begin to burn off when the former owner left the employ of the buyer. This protected the buyer where the former owner’s employment continues beyond the end of the business sale non-compete.
Because the rule prohibits the non-compete clause in the former owner’s post-closing employment agreement, buyers will have to be careful when deciding how long to employ the former owner after closing.
What actions should you take for your business:
- First, provide the required written notice to each current and former employee and contractor with whom your business has a non-compete agreement no later than August 19, 2024. If you can’t locate a former employee or contractor, there are requirements in the rule. In any event, document your efforts and maintain that documentation.
- Remove all non-compete clauses from your employee and independent contractor agreements. More on this can be found in our Florida Business Contracts Handbook.
- Carefully tailor each of the non-disclosure/confidentiality, non-solicitation/ non-acceptance, training-repayment, and no-hire clauses in your employment and independent contractor agreements so they are limited to the circumstances of your business and market, and aren’t so broad that they prohibit, penalize, or function to prevent an employee or contractor from working for someone else or operating a business after being employed or engaged by your business.
If you have any questions about the rule or your situation, please call me at 407-649-7777. We are happy to help.
Nothing in this article is legal or other professional advice or creates an attorney-client privilege. Before acting on any of the information in this article, the services of a competent professional should be sought for your particular situation.
