Given the increasing restrictions on employment-related non-compete agreements under state laws, and the possibility that the Federal Trade Commission’s non-compete ban could be reinstated, employers must strategically consider their approach to non-competes to increase the likelihood of enforceability in the employment context.
On August 20, 2024, a federal district court in Texas set aside the Federal Trade Commission’s Non-Compete Clause Rule (the “FTC Rule”) banning almost all non-compete clauses just days before the FTC Rule was set to take effect. Although the decision means that enforcement of the FTC Rule is blocked for now, employers should be aware not only of the possibility of the FTC Rule’s reinstatement, but also of state laws that will continue to impact non-compete agreements.
The FTC Rule aimed to ban most non-compete clauses with workers, subject to certain exceptions in connection with the sale of a business, and preexisting non-competes with senior executives. The FTC Rule does not apply to other types of employment restrictions, such as non-disclosure agreements (“NDAs”) and non-solicitation agreements, so long as the specific covenants would not function i.e. as non-compete restrictions.
The FTC has appealed the district court’s ruling, which could allow the appellate court to overturn the district court’s decision. Even if the FTC Rule remains unenforceable, that should not be interpreted to mean that all non-compete agreements in the employment context can be enforced. Many states have laws that limit the enforceability of non-compete agreements or ban them entirely. For example, in Illinois, non-compete agreements (as distinguished from other restrictions such as NDAs) entered into on or after January 1, 2022 are unenforceable against employees earning $75,000 or less per year (set to increase to $80,000 per year beginning on January 1, 2027). Illinois law also prohibits non-solicitation agreements with employees earning $45,000 or less per year (set to increase to $47,500 per year beginning on January 1, 2027), and establishes other requirements for employers, such as advising an employee in writing to consult with an attorney before entering into a covenant not to compete or a covenant not to solicit, and providing an employee at least 14 calendar days to review such covenant before signing. Notably, Illinois law also invalidates non-compete restrictions where an “at-will” employee separates from employment less than 2 years from the original hire date. Heston Morton utilizes certain approaches which may support enforceability of non-competes even in “at-will” agreements.
This article provides only a high level summary of developments and considerations regarding non-competes in the employment context. Please note that non-compete laws, including judicial decisions, evolve rapidly and are quite complex in terms of language, scope, exceptions and other aspects which may impact the course of action of employers and employees alike. Parties should seek legal advice before entering into any non-compete agreement or other restrictive covenants. Heston Morton is committed to helping our clients strategically consider their approach to non-competes. If you would like to discuss these considerations and how they may apply to your business or you, as well as compliance and alternative approaches, please contact Paul Morton ([email protected]) or Jessica Heston ([email protected]).
