FTC’s rule banning non-competes in US effective from 4 September, if it survives

On 23 April 23 the U.S. Federal Trade Commission (FTC) voted 3–2 along party lines to ban non-compete clauses in employment contracts. Legal challenges to the rule may delay or stop the rule from coming into effect, but if it is unsuccessful, the rule will come into force on 4 September, 120 days after publication in the Federal Register.

The “Non-Compete Clause Rule” – or the “Final Rule” as it’s called is wide ranging, covering not only employees but also independent contractors, consultants, interns, volunteers, apprentices, and workers who are hired by one party to work for another. As for senior executives, who the FTC defines as earning more than $151,164 annually who are in a “policy-making position”, the rule operates differently. Existing non-competes for senior executives remain enforceable whilst non-competes with senior executives after 4 September will be prohibited.

With litigation underway on various fronts the rule may not survive, or may be delayed, but if it does survive what should employers in the US be doing now, if anything to protect the business? Should they do nothing and wait and see what happens, or embrace the change and plan for a future without non-competes? Or, perhaps, they should find a middle ground? Earlier I caught up with US lawyer Ben Stockman who joined me by video-link from New York to discuss the options:

Ben Stockman: “Well, I think for those clients who do want to take a bit of a wait and see approach, since the deadline for compliance is not yet on our doorstep and the litigations have just commenced, and there's a possibility that court might issue a nationwide injunction as a result of one of those litigations that would effectively hold the law in abeyance until the litigation plays out. 

There's always the possibility that occurs, in which case, employers would be able to continue their current practices until and unless that injunction were lifted. But putting that aside, I think a lot of employers will at least be following the litigation and may take a wait and see approach but, even those that do should start to evaluate how they're going to proceed if the rule is upheld. That could involve, as I've just noted, revisiting your non-disclosure agreement language, your non-solicit provisions, doing an audit of your senior executives to determine who would pass the FTC’s test for non-compete enforcement,  who would not. Then I think there's going to be an increased reliance on old concepts that, perhaps, were not as favoured as non-competes because non-competes were seen as more watertight, such as an emphasis on garden leave concepts, an emphasis on a longer notice requirements for employees who give notice that they are exiting the company, for example, and different variations on that theme whereby the company continues to employ somebody for an extended period of time and pay them with the understanding that an exit has been predetermined at some future date allowing the company to shore up its client relationships and transition those relationships before the executive exits the company. I think those are the types of concepts that might come more into favour if the rule is upheld.”

Joe Glavina: “You mention garden leave and longer notice periods which, of course, are not post-termination restrictions so they are not caught by the rule. But they’re expensive aren’t they?”

Ben Stockman: “Certainly. Anytime you're effectively as an employer you are paying to have somebody sit on the sidelines, so to speak, there's a real cost associated with that and that's why non-competes were so favoured here in the US. Some employers, maybe 10 years ago, you see less and less of this now because of the way that states have been promulgating laws to cut back on the enforceability of non-competes, but it wasn't so long ago that for middle managers and up, many US employers would send out an employment offer letter that contained a non-compete in it, and the consideration, in other words, the payment for the imposition of that non-compete, was basically an offer of employment. So, saying we will offer you this employment and as a term and condition of that employment you can't compete for two years after you leave employment. Mostly those days are gone, particularly with regard to middle management, so to speak. Now, those types of provisions you see less and less, and you see them only for the higher-level executives, assuming that the company is interested in the actual enforcement of those agreements because in states like New York, California, Illinois, Massachusetts, and others, the trend has very much been in the decline of the enforceability of non-competes of that nature. So, all that to say, Joe, I think, it can be expensive. I think  it'd be more expensive and for that reason I think that employers will very much lean and try to come up with more creative ways to enhance their non-solicit practices and their non-disclosure practices.”

Joe Glavina: “Of course, in the US have an election in November and odds favour a change in administration which means even if the litigation is unsuccessful the rule could still be short-lived. What chance of that in your view?” 

Ben Stockman: “I think there's a very good chance. This is the type of thing that is not favourable to business, that's for sure, and these are the types of issues that Republican administrations have focused on when they've come in and, historically, reversed. We've seen that also with law established at the National Labour Relations Board, for example, where you had during the Obama administration a set of rules were promulgated on a number of different issues and then, with the changes to the Trump administration, the priority was to roll back those rules, change standards, and so you have this whipsaw effect that occurs in this country as a result of the agency law that's established in agencies such as the FTC. So, I think that it might not be a day one priority of a Trump administration, but I would suspect that at some point after the election that you could see, whether it's some sort of attempt through an executive order, or a mandate to the FTC to change course, a softening or reversal of the rule.”

Last week Ben talked to this programme in some detail about the scope of the Final Rule and some of the legal challenges it faces. That’s  ‘FTC votes to ban non-competes across the US’ and is available for viewing now. We’ve included a link to it in the transcript of this programme for you.

LINKS
- Link to HRNews programme: ‘FTC votes to ban non-competes across the US’