News

"The FTC defines 'senior executive' based on both an earnings test and a job duties test -- and the job duties test is quite restrictive.... You likely cannot enforce a non-compete against a Sales Manager who makes $250,000 annually, a Department Head with policy-making authority over only his segment of the business, a mid-level manager who owns a small share of stock in the Company, or a highly-compensated Chief People Officer who only has advisory authority but cannot make final policy decisions."

"[1] How the FTC defines noncompetes.... [2] Exceptions to the noncompete ban.... [3] Your state laws may still apply.... [4] Nondisclosure agreements may be restricted too.... [5] Lawsuits enforcing prior noncompetes do not go away.... [6] What your company must tell you.... [7] Legal challenges will severely test the noncompete ban."

"The final rule already faces multiple legal challenges which may delay the final rule's effective date or invalidate it entirely.... Despite the uncertainty ... employers should consider taking steps to identify current noncompetes, individuals who would need to receive notice, and post-employment restrictions for senior executives that may need to be shored up in the event that the rule takes effect on September 4."

"The U.S. Chamber of Commerce and other entities have already filed federal court lawsuits seeking an emergency injunction against the regulations. There is reason to believe that these efforts will be successful ... To the extent employers believe noncompetes constitute a valuable business practice designed to protect company trade secrets and confidential information as well as the valuable goodwill that exists between employers and their customers, noncompetes remain legal and enforceable, subject to the various state laws limiting them."

"On May 6, the Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), and Federal Housing Finance Agency (FHFA) issued a notice of proposed rulemaking and request for public comment ... [to] regulate 'incentive-based compensation,' which is defined broadly as 'any variable compensation, fees or benefits that serve as an incentive or reward for performance.' Under the proposed regulation, incentive-based compensation should not encourage inappropriate risk-taking by covered individuals, either by being excessive or by being designed in a way that could lead to material financial loss."

"What types of non-compete clauses are barred by the Rule? ... Who is considered a 'senior executive' under the Rule? ... Can an employer enforce an existing non-compete against a worker that qualifies as a senior executive? ... Are non-disclosure or non-solicitation provisions barred by the Rule? ... What are the notice requirements under the Rule? ... Do employers need to provide notice to former workers? ... Does the Rule have a safe harbor provision for employers?"

"The final rule was published in the Federal Register on May 8, 2024, and the FTC notes that its expected effective date is therefore September 4, 2024.... [T]he rule's effective date is employers' deadline to comply with the rule's notice requirement.... The final rule includes model language to assist employers in sending compliant notices to applicable workers, which can be delivered to workers via hand delivery, regular mail, email, and even text messages."

"One of the primary exemptions under Section 280G permits the company to establish by clear and convincing evidence that a payment is 'reasonable compensation' for services to be provided after the change in control, which includes refraining from providing services due to an enforceable noncompete covenant. To the extent that covenants based on noncompete clauses are unenforceable under the Final Rule, a significant tool used to reduce parachute tax penalties will cease to be available. T"

"Given the legal challenges to the FTC's rule, employers should know New York City's recent proposed challenge to using noncompete agreements, Bill 140 , is more onerous to employers than the FTC rule.... If passed, Bill 140 will be retroactive and require employers to affirmatively 'rescind' any noncompete by the date the law goes into effect."

"[T]he presiding judge ... issued a series of Orders that require all briefing on the request to stay/enjoin the FTC Rule to be completed by June 12. The Court will then announce by June 13 whether it will make a decision based on the parties' briefing or conduct a hearing, which would take place on June 17.... [T]he Court has committed to issuing a decision by no later than July 3 on the request to stay/enjoin the FTC Rule from going into effect." [Ryan v. FTC, No. 24-0986 (N.D. Tex. complaint filed Apr. 23, 2024)]

"Though the FTC argues [that] the agency charged with regulating 'competition' can regulate 'non-competition' agreements, the legal challenge will be more complicated. The Commission will be pressed to defend the lack of specific delegation of authority under Section 5 of the FTC Act by Congress to regulate contracts historically governed by state law. Indeed, two of the commissioners voted against adopting the final rule for this reason."

"[1] How the FTC defines noncompetes.... [2] Exceptions to the noncompete ban.... [3] Your state laws may still apply.... [4] Nondisclosure agreements may be restricted too.... [5] Lawsuits enforcing prior noncompetes do not go away.... [6] What your company must tell you.... [7] Legal challenges will severely test the noncompete ban"

"Within 24 hours of the FTC voting to approve the Final Rule, several entities ... filed lawsuits against the FTC in the Federal Court seeking injunctions to postpone the Effective Date and to invalidate the Final Rule. Additional lawsuits have been filed, and are anticipated to be filed, by other interested parties."

"The Final Rule goes beyond prohibiting straightforward noncompete clauses. It also prohibits functional noncompetes, which are arrangements that serve to restrict, 'penalize,' or 'function to prevent' a worker from working after their current employment terminates. In the preamble to the Final Rule, the FTC indicates that inclusion of the term 'penalize' is meant to prohibit clauses that 'require a worker to pay a penalty for seeking or accepting other work or starting a business after their employment ends.' "

"[E]mployers should take the following steps: [1] Determine which existing non-competes are with Senior Executives.... [2] With regard to Senior Executives that are not currently subject to non-competes, consider strategies for entering into non-competes with these individuals, if otherwise permissible under state or local law, before the Final Rule becomes effective. [3] Tax Exempt Entities should evaluate whether they fall within the FTC's jurisdiction, in which case the non-compete ban requirements will apply to them."

"Employers should not stop using noncompetes, at least if and until the Rule actually becomes effective.  ... If the Rule is not enjoined a month before the effective date, employers should: ... [1] Implement stronger NDAs and non-solicitations with workers with noncompetes. [2] Try to limit sharing of confidential information and building of relationships with the least number of people. [3] For people that the company feels a noncompete is essential, consider having an 'interim period' where the worker promises to stay a worker for a few hours a week (likely remotely and just doing transitional duties) upon notice of resignation or termination for a period of time (and during the period of time, you can have a noncompete)."

"Not-for-profits should perform a careful analysis to determine if they are subject to the final rule or if any of their businesses are subject to the final rule before any notices are sent to employees.... [E]mployers concerned with protecting their confidential and proprietary information should not only eliminate non-competes from their employment agreements but also carefully review and revise non-solicit, non-disclosure, and other restrictive covenants to ensure that they are narrowly tailored to protecting the employer's confidential and proprietary information."

"[T]he legal challenges assert that the Noncompete Rule upends centuries of established contract law as noncompetes have been enforceable contracts since before the Nation's founding. Indeed, enforcement of non-competes has been a feature of English common law since the early 18th century ... This raises the question of whether the purported benefit of the Noncompete Rule to workers and the economy as a whole touted by the Agency outweighs the costs to employers who have long relied on the expectation of enforceable noncompetes to protect their specialized training, investment, and confidential information ... Ultimately, [the authors] believe ... that the FTC's Noncompete Rule is unlikely to be upheld in its current form."

"A change from the proposed rule is that there is an exception for existing Noncompetes with 'senior executives'. A senior executive is an individual earning more than $151,164 in the preceding year who is in a 'policy-making position'.... This narrow definition excludes many highly paid employees such as sales and investment professionals or executives without policy-making authority."

"Existing noncompetes with 'senior executives' who are in 'policy-making positions' with respect to the entire business enterprise and earn more than $151,164 annually remain enforceable.... The Final Rule does not prohibit enforcement of noncompete clauses that are entered into pursuant to a bona fide sale of a business entity.... The Final Rule's definition of senior executive is significantly narrower than similar concepts in other legal regimes that govern executive compensation."

"[1] Determine which of your workers have agreed to non-compete clauses. This may include former workers, and may include 'Senior Executives.' [2] Consider whether your existing agreements will be enforceable under applicable state laws that are not preempted by the FTC rule.... [3] [S]tart thinking about the logistics of notifying your workers about unenforceable non-competes. [4] If your business relies on trade secrets or other confidential information ... consider taking additional steps to protect your most valuable information from being misappropriated by departing workers ... [5] Develop a system to keep track of any restrictive covenants you use moving forward."

"The Chamber alleges in its complaint that 'the economy as a whole will suffer' because dominant firms snatch the best employees from startups and small businesses. The Chamber argues that the FTC's Rule is an assertion of power that is contrary to centuries of state and federal law and relies on 'novel claims of authority.' " [Chamber of Commerce of the U.S.A. v. Federal Trade Commission, No. 24-00148 (E.D. Tex. complaint filed Apr. 23, 2024)

"To date, three lawsuits have been filed challenging the legality of the FTC's Final Rule banning non-competes. The initial two cases were filed in Texas federal court, which is widely viewed as a more hospitable forum for attacks on the Rule. The third case was filed in Pennsylvania federal court, possibly for the strategic purpose of creating a circuit split to enhance appellate options.... While other lawsuits against the FTC and its commissioners trickle in, it's likely the U.S. Chamber's lawsuit will take the lead."

Rev. Apr. 2024. "Split-dollar life insurance arrangements can be a key feature of executive compensation packages.... Review the [SEC] Form 10-K, Annual Report, including items 10,11 and 12 to identify the 16b executives.... Once you've established that the issue exists, determine who the policy owner is and whether the employee or the beneficiary is entitled to receive any death benefit or cash surrender value under the policy."

"Standard disability plans typically cover anywhere from 40-70% of an employee's salary; however, the problem lies within the limitations of the coverage. This disability plan structure typically does not account for bonuses or other types of incentive compensation, potentially leaving a large gap for those employees who are rewarded with such financial incentives based on their performance. Carve-out plans can help provide the additional protections that this population requires."