Many companies use non-compete agreements as part of their standard employment contract. A non-compete agreement or covenant not to compete is a legally binding agreement where one party promises not to engage in activities that compete with the other party. Usually, an employee is the person promising not to compete. Typically, non-compete agreements are valid for a specific period and/or geographic location.
A new rule from the Federal Trade Commission (FTC) could change how non-compete agreements are used in the tech industry and other industries. Our New York employment attorneys discuss the changes and how they may impact how tech industries protect their trade secrets and business interests.
What Is the Final Non-Compete Clause Rule?
The FTC released the Final Non-Compete Clause Rule to take effect on September 4, 2024. The Final Rule bans most post-employment non-compete agreements between workers and employers.
On August 20, 2024, a district court stopped the FTC from enforcing the rule. The FTC has appealed. However, the district court order does not stop the FTC from initiating enforcement actions on a case-by-case basis.
Below are significant provisions of the Final Non-Compete Clause Rule:
Mandatory Notice Requirement
Employers must give workers subject to a non-compete clause notice by September 4, 2024. The notice must inform the employees that the non-compete agreement cannot be legally enforced.
Ban on Non-Compete Agreements
The Final Rule prevents employers from entering or enforcing a non-compete agreement. It also prohibits an employee from representing to a worker that they are subject to a non-compete clause. The rule broadly defines “workers” so that it covers most non-compete agreements.
Exception for Senior Executives
The Final Rule allows employers to grandfather non-compete clauses in employment agreements with Senior Executives. The rule prohibits employers from entering new non-compete agreements after September 4, 2024.
Exception for Clauses Included in a Bona Fide Sale of a Business
The Final Rule does not prevent parties from negotiating a non-compete agreement as part of the sale of a business. It also applies to an individual’s sale of their ownership interest in the business or substantially all the company’s operating assets.
What Should Employers Do Right Now About Non-Compete Agreements?
Until the legal challenges are resolved, employers can prepare to implement the rule without full performance. For example, employers can identify workers subject to the Final Rule, so they are ready to send required notices if necessary. Employers should also review all non-compete agreements to ensure they comply with applicable state and federal laws.
Employers with non-compete agreements should also seek legal advice from an employment lawyer. The legal status of the Final Rule could change at any time. Employer lawyers closely monitor the status of the Final Rule to help their clients navigate the law and maintain compliance with the current law.
Learn More About Non-Compete Agreements by Scheduling a Consultation With Our New York Employment Attorneys
The changes in the laws governing non-compete agreements can be confusing. It is crucial that owners and companies understand the changes to comply with the new laws. Contact Lipsky Lowe LLP to schedule a consultation with our New York employment attorneys for answers and legal guidance.