David Harmon: Hi, I’m David Harmon.
Mariya Gonor: And I’m Mariya Gonor.
David Harmon: And we are The Employment Strategists. Welcome to the next episode of our podcast entitled Unchained, Unpacking the FTC Ban on Non-Competes.
Mariya Gonor: David, did anything new happen while we, between the old podcast and this podcast, anything at all?
David Harmon: A lot has happened, Maria, but the most important thing that’s happened in the employment space is the April 23rd meeting of the Federal Trade Commission. where they held an open virtual meeting that I happened to have listened to where they, in effect, put out a rule that will be published in the Federal Register on May 7th that will restrict and prohibit enforcement of non-competes.
Mariya Gonor: So, the rule that was published is about 500 pages long and David and I reviewed it for you. for you so that you don’t have to. You’re welcome. So, we will discuss the implications of the new rule, of the new ban. And as always strategies for employers and employees with respect to this new and pretty significant development, as we’ve covered in our last episode, the FTC initially proposed this rule back in 2023, and it received 26, 000 comments. This is pretty controversial. And actually on April 23rd, when the new rule was announced. Two lawsuits have been filed to challenge the FTC’s ability to promulgate this rule.
David Harmon: One of those lawsuits was brought by the U. S. Chamber of Commerce to block the rule, and basing their claim that the agency doesn’t have the power to issue the ban and that even if it did, such a ban isn’t lawful. Then there was another lawsuit brought on behalf of a tax services firm in Texas, also bringing the same cause of action of unenforceability.
Mariya Gonor: So for our part, we’ve been getting a lot of questions from our clients as to what the implications are and what to do next. So let’s dive right into those implications. So first, as of today, the rule is not yet effective. It’s scheduled to be effective. 120 days after its publication in the federal register, which is David noted a few minutes ago is currently scheduled for May 7, 2024.
David Harmon: Which would then make the enforceability or the effective date of the rule. September 4th. Which is right after Labor Day.
Mariya Gonor: Congratulations to workers everywhere.
David Harmon: That’s quite a coincidence in terms of timing.
Mariya Gonor: Do you think that was intentional?
David Harmon: It’s possible. We’re in an election year, so it’s possible.
Mariya Gonor: FTC. Yeah, FTC is very clever. Do you think someone like sat down and was like, Yes, this is what we have to do. So symbolic.
David Harmon: I don’t know But at least there’s four months in which we can see what happens before companies and individuals have to take affirmative steps. Although preparedness is really something that should be taken into consideration.
Mariya Gonor: Just as Boy Scouts, always be prepared.
David Harmon: That’s right.
Mariya Gonor: So, as I’m sure, the first question on everyone’s mind is, what does the rule actually prohibit?
David Harmon: So the rule broadly prohibits imposing any new non-compete agreements. And this would be applicable not only to employees, it would be applicable to independent contractors, interns, and any unpaid workers. So, the ban, uh, is going to extend to all terms of employment that would restrict employees from seeking jobs with a competitor or starting a competitive business.
Mariya Gonor: So, let’s be very clear and again stress that this applies to non-competes that the employers would enter into in the future, meaning future non-competes are prohibited. The only exception to that rule for future non-compete agreements is with respect to a sale of a business. Now, what happens with the existing non-competes? So those non-competes are also prohibited, but the FTC allowed for two exceptions. One for senior executives and the other one in connection with the sale of a business. So, the natural question arises, who is a senior executive?
David Harmon: So, the rule defines a senior executive as a worker who is in a policy-making position and who received total compensation of at least 151, 164 dollars. Interesting exact amount.
Mariya Gonor: I, I love it. I love it when they give us round amounts because it makes our life so much easier.
David Harmon: So, to clarify the job duties test, the rule includes this definition of policy making, and that’s as a business entity’s president, chief executive officer, or the equivalent, or some other officer of the company. The FTC clarified that by incorporating the term officer in the definition of senior executive with the intent that it should apply to workers at the, what they call the highest levels of a business entity.
Mariya Gonor: Yeah. I guess the intent here is to prevent very clever employers from giving, you know, most like mid-level managers, some, uh, policy-making power and then trying to bind them to a non-compete. If you, like me, are questioning the number of 151 and thinking that it’s low, especially, you know, for someone who lives in the New York metropolitan area, The FTC had an explanation for that.
David Harmon: Mariya, some of the comments that the FTC received in connection with the proposed rule addresses the earnings that I believe are across a wider swath of the United States. They decided on 151, 000 in change to cover as many positions as possible across the country. Now turning our attention to states, we should note that there are several states that outlaw non competes. Those are California, Minnesota, Colorado, North Dakota, and Oklahoma. North Dakota, Mariya.
Mariya Gonor: I know. When I decided to stop picking on Texas last week, I decided to pick on another random state and that, I’m sorry, random state was North Dakota, which actually does contain non-compete agreements, so.
David Harmon: Well, now, now they’ve already banned nearly all or partial non-competes within those states. And then there are other states, uh, for instance, Maryland, that prohibits non-competes for workers who earn less than or equal to 15 dollars an hour. So, there’s a lot of disparity among states. And now this throws a bit of a monkey wrench into the overall non-compete landscape, and that will have to be sorted out.
Mariya Gonor: Yep. So, the third category of non-compete agreements. that would be affected by this rule or could potentially be affected to this by this rule is the agreements that have been already breached, where the breach of the agreement has accrued, meaning the employee left and went to work elsewhere in violation of the rule or if the employer is already in litigation with the employee who had left. So, the FTC made it very clear that the rule does not apply to such occurrences. In other words. If the breach has already accrued, it’s not affected by this rule.
David Harmon: Do you think they’ll be erased to the courthouse steps to file complaints to enforce non-compete during this 120 Day period?
Mariya Gonor: Sure. Why not?
David Harmon: That’s a possibility.
Mariya Gonor: That’s a possibility for sure.
David Harmon: That would that in applicability would also apply at this point.
Mariya Gonor: Of course, absolutely. So, you know, for employers, if you are already in the litigation, I got some calls like that. As soon as this rule was passed, what happens to our litigations on both sides actually, some employees have called me and were like, Oh, hey, does this mean that the employer automatically loses? No, it does not.
David Harmon: Correct. So, what is the workaround for employers and the impact on employees?
Mariya Gonor: So, the FTC was very careful to specifically state that they are not prohibiting other restrictive covenants, such as non-disclosure agreements, such as non-solicitation agreements or no higher agreements, as well as, uh, the agreements that require an employee to repay whatever training costs The employer has extended on their behalf.
David Harmon: By the way, it also includes the proprietary rights, inventions agreements, which include the agreements that protect trade secrets.
Mariya Gonor: So those agreements continue to be enforceable unless they’re written in such a broad fashion as to essentially function as a non-compete and be a de facto non-compete, although it is called something else.
David Harmon: The issue here is that employers will need to look to at their agreements to comply with this rule, to make sure that they are not overly broad, to make sure that they’re not trying to backdoor to enforce a non-compete, and then also at the same time to make sure that they pass muster under the recent NLRB decision regarding these agreements.
Mariya Gonor: Yeah, regarding non-disclosure, exactly.
David Harmon: Yes.
Mariya Gonor: Non-disclosure agreements. The other thing that is significant in connection with this rule is what the employer can do while the employee is still employed by them, right? Because a lot of employers have clauses that require your best efforts to be dedicated to the employer during your employment with them, or exclusive employment provisions that you can’t work anywhere else, or like at least can’t work for a competitor. So that rule does not affect these policies.
David Harmon: So, employers are able to enforce restrictive covenants, non-competes, that are applicable to employees during their employment, not post the rule is designed to impact the enforceability of non-competes that would take effect post-employment.
Mariya Gonor: Okay, so another thing that the employer will have to do in connection with the non-compete agreements that it’s entered into with its workers is to notify the workers that the non competes are no longer valid, and the FTC, being as kind as they are, have prepared a draft or sample notice that the employers can distribute to their employees.
David Harmon: This is something that was done in California as well, and in other states where there are non-compete restrictions put in effect.
Mariya Gonor: So out of the 26, 000 public comments that the FTC received with respect to their proposed rule, I was surprised to learn that 25 of them, 25, 000 of them, sorry, were in favor of the rule.
David Harmon: You know, when I think about that number, 26, 000 comments, 25, 000 coming from individuals, there are more employees in the United States, people that fall under the category of employee than there are businesses. So, it would make sense that the higher number would be coming from employees. So then now I question that number of comments and whether basing their decision on the comments was the fairest way to get to the end zone.
Mariya Gonor: Right. Some of the comments that came from the employees really highlight the uneven bargaining power, especially in some of the more rural areas, and the unconscionable circumstances under which these non-compete agreements might be presented to an employee, right? So, one person said that he was a power washer, was engaged in a power washing business and his boss gave him a document that represented a non-compete and basically said that if you don’t sign it before the end of the week, you don’t have to come in to work next week. He had no choice but to sign it. And at the end of the day, there is definitely a question as to whether or not, if there’s any kind of protectable interest in connection with a power washing business.
David Harmon: Well, I think that runs to some basic contractual principles under contract law, whether someone is signing an agreement under duress and where there is not an ability to have the provision whatever it may be, fully explained and clarified, and that that individual has the ability to go out and hire counsel. I know that in our work, where we represent a lot of senior executives in their transition from one company to another, those executives have the wherewithal, financial or otherwise, as well as the educational background, to understand that these provisions need to be evaluated and they need to obtain counsel in order to understand whether or not they’ll be effective or not, and to understand before they have to sign what that means to them. That is presents a significant difference between the rank-and-file worker who doesn’t have the means or the ability and the senior executive.
Mariya Gonor: You make a great point because even in states that don’t have an outright ban on non-competes. For instance, New Jersey, we don’t have an outright ban on non competes, but we do have what’s called blue-penciling, where the court of competent jurisdiction could look at the non-compete agreement and determine whether or not it’s fair in geographic scope or temporal scope and change it if necessary.
But to your point, a lot of workers who cannot afford an attorney, who are not going to conduct that evaluation, will not know whether or not. This is an enforceable agreement, and we’ll just abide by it out of the fear that they may get sued by the employer.
David Harmon: And then the question is whether or not companies will actually go ahead and seek to enforce those. Mariya, here are some stats. It’s estimated that 1 in 5 Americans, or 30 million people, are subjected to non-compete agreements. The FTC also stated that 53 percent of those making hourly compensation were covered by non-competes. It’s an extraordinary number.
Mariya Gonor: Absolutely. Yes. And when you consider, again, as we noted before, the protectable interest on the other side by the employer, I think that highlights the reason why the FTC felt that it needed to act with respect to non-competes.
David Harmon: I think that we should talk about the next steps for employers and employees while this 120-day period will be in effect?
Mariya Gonor: Yes. So from the employer perspective, if there is a protectable interest, like we talked about, if there is a trade secret, a special methodology, some special sauce that the employer should evaluate the circumstances with counsel and determine whether or not Any other of the restrictive covenants, such as a confidentiality agreement, non-disclosure, or trade secret protection act, could apply to prevent disclosure of that information.
David Harmon: One of the things that is a good move for employers now is to have their agreements looked at in anticipation of the rule going into effect after early September. One of the things to look at, of course, will also be whether or not any of the current agreements that are in place, these restrictive covenant agreements, are viewed or could be viewed as violation of the rule as a backdoor way of establishing a de facto non-compete.
Mariya Gonor: One of the examples that the FTC offered in their proposed rule was if you have a confidentiality agreement that says you cannot disclose or utilize anything you’ve learned about the employer’s industry in your future employment, right? So that would be an example of a de facto ban because if you can’t use Any of the knowledge you’ve learned about the industry, especially if it’s a big industry, you simply can’t work in that industry.
David Harmon: So, these agreements are all going to have to dovetail with one another in a different way. If you think about the, uh, the metaphor of all of these restrictions kind of holding hands and dancing in a circle together, and now one of them, the non-compete dancer, is now removed from the circle, you’re going to have to look at the circle and see how the, uh, remaining restrictions are all dancing together and it has to be well coordinated.
Mariya Gonor: Who is your weakest link?
David Harmon: That’s true. And you don’t want any of them to be dancing with two left feet.
Mariya Gonor: That’s also very true. So, with respect to employees, the strategy here is to similarly take a look at whatever restrictive covenants you have in your current agreement and evaluate them for enforceability with counsel, not just in light of the FTC’s ruling, because again, it’s not going to go into effect for another 120 days if an employee is looking to make a move now, maybe the agreement should be evaluated in connection with enforceability under state law.
David Harmon: Well, I think right now this is a certainly a hot topic, it’s a hot issue, and it’s very much front and center in terms of employment agreements, employment restrictions, employee mobility, and it’s just something that now because of this, uh, ruling will be front and center.
Mariya Gonor: We will continue to watch as these challenges continue to grow. and lawsuits develop and continue to update you on the status with respect to non-competes. And we’ll also continue reading lengthy documents published by governmental entities in connection with employment laws.
David Harmon: Remember that this is not to be considered legal advice and that you should certainly consult with your own independent counsel. If you’d like to continue the discussion, please feel free to contact us at theemploymentstrategists@norris-law.com