What Is the New Rule Impacting Noncompete Agreements?

Key Podcast Highlights

What Is a Noncompete Contract?

• It’s a contract between an employee and an employer that states not to compete with the employer, if the employee leaves the company.

Is There a New Rule Impacting Noncompete Agreements and Businesses?

• Yes, the Federal Trade Commission (FTC) by a vote of three to two, issued a new rule which effectively makes noncompete agreements ineffective.
• It’s important for businesses to put a notice out about this update. The FTC gives recommended language for this notice to notify all employees that their noncompete clauses will no longer be effective.

Transcript

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Gene (00:01):

Hey everybody, it’s Gene Marks and welcome to this week’s episode of the Hartford Small Biz Ahead podcast. Thank you so much for joining me. The Federal Trade Commission by a vote of three to two, issued a new rule which effectively makes noncompete agreements ineffective. This has a big impact on your business. Most businesses, noncompete agreements have been around for forever and now the FTC is saying that they are being made to be ineffective. No more noncompete agreements. So what does that mean? Well, first of all, understand where the FTC is coming from. FTC’s chair, Lina Kahn, she said in a press release, I just wanna read this to you, that noncompetes cause… they keep wages low, they suppress new ideas, and they rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned.

Gene (01:09):

That’s how she feels. Now, what is a noncompete contract? It’s basically a contract between an employee and an employer, not to compete with the employer, if the employee leaves the company. So if they leave for a competing business that might in the same industry or a similar business that’s within a geographical range, a lot of times employment agreements include a clause saying you’re not allowed to do that, at least for a specific period of time. So, employers are like, “hey, that’s not fair. You can’t go to a competitor down the street or even start up a new business down the street and potentially use some of our proprietary information.” So there’s been these noncompete clauses in employment agreements for as long as I can remember. Well, no more. They will soon become ineffective.

Gene (02:02):

Now, the U.S. Chamber of Commerce is suing the FTC and they’re gonna be joined by other business groups that are also suing them, saying that this is unconstitutional and beyond their scope as an agency. So there’s more to come on this, but before I get to that, let’s first of all, just talk about some of the tactics that you should be having. What do you do with these noncompetes? Okay, well, first of all, you need to wait for it to become effective. Now, inevitably and maybe by the time you’re listening to this, the FTC has filed this new rule with the Federal Register and when that happens, it will become effective within 120 days, four months later. So we’re looking at September when this would actually become effective. Okay? You need to put a notice out. And by the way, the FTC gives recommended…

Gene (02:58):

Language for this notice to notify all employees that their noncompete clauses will no longer be effective. It’s a rule that you need to be complying with. You should also understand some of the exemptions from this rule. For example, if you have any highly paid executives like those making more than $151,164 a year, don’t even ask why it’s so exact, but anybody making more than about $151,000 a year, and they’ve already got this noncompete arrangement in place, they’re gonna be grandfathered in. So they’re gonna have to continue to apply, abide by your noncompete. But if you hire anybody after four months from now, no matter what you’re paying them, you can’t be using a new noncompete agreement. So you do a little bit of window of time if you wanna, if you wanna raise somebody’s salary above $151,000 and then issue them a noncompete, have them sign a noncompete, you’re still within your rights to do that.

Gene (03:54):

Because that’ll be grandfathered in for at least the next four months until all noncompetes become ineffective. By the way, there are some other exemptions to noncompetes, for example, nonprofit organizations. They’re exempt from this rule, meaning that you can still have noncompete agreements if you run a nonprofit. Nonprofits don’t fall under the scrutiny of the FTC and also people that are in the banking industry or certain financial services companies. They also are exempt from this because bankers fall under the regulations of different departments of the federal government, but also not the FTC. So if you’re in the banking or some parts of the financial services world, you may be exempted from this rule and can still go ahead and have noncompetes. So what do you do as a business? So you now have the dates down as to when this is gonna be effective four months from… probably four months from now.

Gene (04:50):

Maybe you’re exempted, maybe you’re not. Most likely you’re not exempted. So there are a few things that you can do to protect yourself. For example, just know that when you sell your business to somebody that buys… you can still have a noncompete agreement. So if you sell your business, somebody buys the business for you and is part of that agreement, they say to you, “hey, you can’t compete with me for the next two years.” That’s still kosher even under this regulation. And there are certain deferred compensation agreements or garden leave arrangements. That’s when you like, keep somebody on the payroll for a period of time, even though they’re not really doing any work for you, that’s not affected by these agreements. You can still go after proprietary information to protect your proprietary information and trade secrets with nondisclosure and confidentiality agreements. Those are still okay. So you might not have a noncompete agreement in place, but you can beef up the language in your NDAs, your nondisclosure…

Gene (05:57):

Agreements or your confidentiality agreements and make sure that they are really protecting your proprietary information so that any employee, whether employed by you or when they leave, they cannot go and use your information anywhere else. So that’s not a noncompete, that’s just protecting your proprietary information. So that to me is like the biggest piece of advice I can give you, is to focus on those. If an employee leaves you and goes to work for a competitor, so be it. What you’re really concerned of is them walking away with a customer list of yours or proprietary information. So make ’em sign NDAs, confidentiality agreements and really beef them up. The other thing I recommend is you should definitely, check with your state. The way the rules work, it’s kind of like the minimum wage laws, like the federal minimum wage is $7 and 25 cents an hour.

Gene (06:47):

But if you live in a state or operate a business in a state with a higher minimum wage, the higher minimum wage prevails. It’s the same thing with noncompetes. So, if there are even more restrictive rules in your state, I’m thinking California or Illinois or New York, you want to check that because if they’re more restrictive, they will supersede even the federal rules. So it’s the state and the federal, whichever is more restrictive. That’s the one that’s going to be in effect. Okay? So bottom line is this, will this happen or not? I mean, there are lawsuits, there’s gonna be delays in all of this. You still need to treat this seriously.

Gene (07:35):

You need to move ahead. You need to disclose, do the FTC disclosure to your employees of when it will be ineffective. And, you need to be, bear in mind that anybody you hire over $151,000 are gonna need, in the future, after this becomes law, you won’t be able to give them a noncompete. If this doesn’t happen, if it gets overturned in the courts, then you go back to business as usual. But this is a new rule for the FTC. It’s serious stuff, and it’s something that you should be abiding by. So those are my thoughts, and that is my advice on noncompete agreements. You have been listening to the Small Biz Ahead podcast. My name is Gene Marks. If you need any help or advice running your business, visit us at SmallBizAhead.com. You can also get links to our podcast there as well. Thank you very much for joining me this week. Good luck with this new noncompete rule. I’ll be back to you next week with some more advice to help you run your business. Take care.

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