The Federal Trade Commission in 2024 issued a final rule that banned the use of nearly all non-compete agreements. The ban would have applied to both prospective and existing non-competes — having a significant effect on business owners nationwide.
While the Biden-era ban is now dead, that doesn’t mean that employers are free to require employees to enter non-compete agreements without restriction.
The Trump-era FTC has announced that it is launching new enforcement efforts with respect to such agreements. Specifically, the agency has created a task force designed to identify and target anti-competitive agreements that affect the labor market. Employers should pay close attention to the new rules and standards that will apply when determining the enforceability of non-compete and non-solicitation agreements.
New Standards for Enforcement
Business owners have historically relied on non-compete agreements to protect their business interests, value and trade secrets. Critics argue that such agreements make it more difficult for workers to change jobs and demand higher pay and restrict overall competition in the labor market. In recent years, the FTC has sharply targeted non-competes via enforcement actions.
The Trump-era FTC has already taken action against one company that required all employees to sign non-compete agreements regardless of their position within the company. The agency found this practice to be unacceptable and entered a consent order that prevented the company from requiring non-competes, with an exception for certain key employees.
Concurrently, the FTC chair announced the factors that the agency will evaluate when assessing the enforceability of non-compete agreements.
The FTC will primarily consider (1) the size of the company, in terms of the number of employees and the business itself; (2) the pool of employees subject to non-compete agreements; (3) the behavioral, temporal and geographic scope of the non-compete agreements; and (4) whether the employment responsibilities of the employees with non-compete agreements justified the restrictions.
This standard, according to the FTC, is similar to the common-law standard for evaluating the enforceability of non-compete agreements. It focuses on the reasonableness of the agreement: whether the employer has a legitimate business interest to protect and whether the restrictions imposed are no greater than necessary to protect that interest.
The FTC’s initial case also addressed the use of non-solicitation agreements. The consent order limited those agreements to customers whom the employee had personally provided service or had been in contact with during the previous 12 months of employment.
FTC’s Request for Information
The FTC has issued a request for information from the public to gather information about possible future enforcement actions. The agency is asking for information about employers who use non-compete agreements, the terms of those agreements and the given business purpose for the agreements.
People responding to the FTC’s 25-question request have the option of making a confidential submission.
Next Steps for Employers
The FTC was clear that it does not seek to ban all non-competes. Thus, employers who use tailored non-compete and non-solicitation agreements to further legitimate business purposes have no reason to abandon those agreements.
It is important, however, for employers to evaluate their use of non-compete agreements. The FTC seems focused on employers who require all employees to enter non-competes, regardless of their role within the company. Employers might wish to consider reserving non-compete agreements for employees in high-ranking roles.
Employers should also be focused on the scope of their non-compete agreements. Those with overly broad terms or extensive geographic limitations may not be enforceable going forward.
It’s also important to remember that state laws governing non-compete agreements remain relevant. California, Minnesota, North Dakota and Oklahoma ban the use of non-compete agreements entirely, while 34 states and the District of Columbia restrict their use in some manner.
- Learn more with Tax Facts, the go-to resource that answers critical tax questions with the latest tax developments. Online subscribers get access to exclusive e-newsletters.
- Discover more resources on finance and taxes on the NU Resource Center.
- Follow Tax Facts on LinkedIn and join the conversation on financial planning and targeted tax topics.
- Get 10% off any Tax Facts product just for being a ThinkAdvisor reader! Complete the free trial form or call 859-692-2205 to learn more or get started today.
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.