In theory, non-compete agreements can serve important and legitimate business purposes; prohibiting employees from working for a competing business or direct competitor in the same field and sharing trade secrets or confidential and/or proprietary information. Historically, non-compete agreements have been included in employment contracts and sale of business agreements. For certain employees, who acquire certain knowledge, in certain industries, non-compete agreements can make sense. However, given the use of “certain” three times in the preceding sentence, there is a lot of “gray area” with the appropriateness of such a restrictive covenant.
Traditionally, common sense, legislation, and case law have set the boundaries for the “gray area” defining the appropriateness of non-compete agreements. For example, in Florida, non-compete agreements are generally enforceable so long as they are reasonable with regard to time, reasonable with regard to geographic area, and protect a legitimate business interest of the employer. However, the use of three adjectives in that definition, “reasonable” time, “reasonable” geographic area, and “legitimate” business interest, again reflect the sizeable “gray area” concerning the appropriateness of non-compete agreements.
The Federal Trade Commission (“FTC”) has sought to end the “gray area” surrounding non-compete agreements via a Final Rule (not a “proposed rule,” “white letter,” or “advisory opinion”) issued April 23, 2024. The FTC is banning the enforcement of [most*] non-compete agreements nationwide.
What does this mean?
[If the FTC Final Rule is upheld] Effective September 4, 2024, a large majority of existing non-compete agreements will be invalidated, and no new non-compete agreements will be permitted within any of the fifty (50) states, absent four relatively narrow exceptions. Businesses will be prohibited from entering into or attempting to enter into any post-employment non-compete clauses with their workers, regardless of a worker’s title, authority, or salary, except for certain agreements in connection with business sales. Businesses will also be prohibited from enforcing any non-compete clauses or representing that any worker is bound by a non-compete clause, other than agreements with “senior executives” already in effect (see below).
What are the exceptions to the non-compete prohibitions?
- Senior Executives: “Senior executives” in “a policy-making position” earning $151,164 plus per year may remain bound by existing non-compete agreements, but they may not be asked to sign new non-competition agreements moving forward.
- Bona Fide Sale: Non-compete clauses entered into in connection with the “bona fide sale” of a business entity, of an individual’s ownership interests, or of all or substantially all of a business’s operating assets are still appropriate.
- Effective Date: Businesses can still enforce (or attempt to enforce) non-compete clauses where the cause of action occurred prior to the September 4, 2024 Effective Date.
- Good Faith: Businesses can enforce (or attempt to enforce) non-compete clauses “where a person has a good-faith basis to believe” that the FTC’s Final Rule does not apply to said clause.
Does it matter whether a worker is an “employee” or 1099 contractor?
No. The Final Rule applies to non-compete clauses applicable to “workers,” which expressly includes employees, independent contractors, interns, volunteers, and other types of workers.
How will the FTC’s Final Rule affect existing Florida law?
The Final Rule purports to supersede any inconsistent state statute, regulation, order, or interpretation unless the state protection affords any worker greater protection than that provided under the Final Rule. As such, the Final Rule would take precedence over Florida Statutes section 542.335, which permits restrictive covenants, including non-compete agreements “so long as such contracts are reasonable in time, area, and line of business.”
What are employers required to do about non-compete agreements with current and former workers?
The Final Rule requires employers to take the affirmative step of individually notifying all affected workers (both current and former) that their non-compete provisions are no longer enforceable. Notices must be provided in writing and may be delivered by hand, mail, email, or text message.
Does the Final Rule prohibit non-solicitation clauses/agreements?
Provided a contract’s non-solicitation language does not function to prevent a worker from seeking other work or starting a business after their employment ends, non-solicitation clauses remain fair game for employment contracts. The FTC explained that the term “function[s] to prevent” clarifies that should an employer adopt a term or condition that is so broad or onerous that it has the same function as a term or condition prohibiting or penalizing a worker from seeking or accepting other work or starting a business after their employment ends, such a term is a non-compete clause under the final rule.
What should employers do now?
The FTC Final Rule is not yet effective, and before its September 4, 2024 effective date, it must still overcome several legal challenges. Since the publication of the Final Rule, several lawsuits have been filed in federal courts challenging the FTC’s authority to ban non-compete agreements. The lawsuits allege, among other things, that the FTC lacks constitutional and statutory authority to promulgate the Final Rule, and seek orders vacating it and setting it aside. As such, in its effort to remove the “gray area” surrounding non-compete agreements, the FTC has thrust the topic into a legal limbo of sorts until the Final Rule becomes effective. However, even should the challenges to the Final Rule result in a stay of its effective date, it would appear that the tide is turning in favor of workers’ rights and limiting businesses’ use of restrictive covenants such as non-compete agreements. Employers may be wise to revisit their template contracts to address non-compete language and prepare for the future, understanding the risks and benefits of such a course of action.
If you have concerns or questions about a specific non-competition or non-solicitation clause and/or other restrictive covenants in a Florida contract, Roberts Law, PLLC is available to review the agreement and address any questions you may have.
Josh Roberts is a business and litigation attorney at Roberts Law, PLLC with over a decade of BigLaw and in-house technology experience helping businesses and business owners navigate contracts, privacy concerns, negotiations, and dispute resolutions.
Disclaimer: The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction or the jurisdiction applicable to your issue/matter. No information contained in this post should be construed as legal advice from Roberts Law, PLLC or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.
