FTC’s Ban on Noncompetes

The Federal government was very busy in the last month issuing a flurry of laws that affect dealerships and dealership personnel.

May 13, 2024

By Barrie Charapp Beaty
Charapp & Weiss, LLP

As we had predicted, the FTC issued its final rule banning noncompetition agreements, which was published on May 7, 2024 and goes into effect on September 4, 2024.

Many states already have bans on noncompetition agreements, but many of those bans only affect lower-level employees allowing for companies to still have noncompetition agreements for upper management.  In the FTC’s final rule, it bans all noncompetition agreements for employees, including senior executives.  Senior executives are employees who earn more than $151,164 per year and are in policy-making positions.

The bottom line of the rule is that as of September 4, 2024, it is illegal for employers to enter into noncompetition agreements and non-compete clauses with employees at any level of employment.

The definition of  “non-compete clause” is “a term or condition of employment that either ‘prohibits’ a worker from, ‘penalizes’ a worker for, or ‘functions to prevent’ a worker from (A) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (B) operating a business in the United States after the conclusion of the employment that includes the term or condition.”

The FTC did not ban other restrictive employment agreements such as non-disclosure agreements or non-solicitation agreements because their terms do not necessarily prevent an employee from getting another job after the employee leaves their job.  However, the FTC did note that such restrictive employment agreements could be non-competes if they could “function to prevent” an employee from getting another job or operating another business.  Such a determination is made on a case-by-case basis.

What about existing non-compete agreements entered into before September 4, 2024?

For employees who are not senior executives, any noncompete clause or agreement that you may have entered into with that employee will be rendered unenforceable as of  September 4, 2024.  If you have a noncompete with such employees, the rule requires that you provide the employee notice that the noncompete is unenforceable.  Existing noncompetition clauses or agreements with senior executive employees are actually not affected by this rule and will remain enforceable after September 4, 2024.  However, you cannot enter into another noncompete with that senior executive after September 4, 2024.

What do dealers need to do?

Dealers will need to determine what employees have noncompete clauses and send notice to those employees, other than senior executives, that those clauses are unenforceable as of September 4, 2024.  After September 4, 2024, dealers should not enter into any noncompete agreements with any employees.  If dealers wish to have NDAs or non-solicitation agreements, they need to be carefully crafted so that they do not function to prevent employment after the employee leaves the dealership, and thus be considered a non-compete.  If you have an agreement for repayment for training or courses from an employee who departs (i.e., technician), the recoupment of what you actually paid for that employee’s training is permissible, but any agreement should be carefully drafted so that it does not appear as a non-compete.  Counsel should be sought from an experienced attorney on how to carefully craft non-disclosure agreements s and non-solicitation agreements in light of this rule.

There is a chance that this FTC ban on noncompetes may not go into effect on September 4, 2024 because it is subject to several lawsuits.  But as of the date of this newsletter, it is set to become effective on September 4, 2024, and we will update you should that change.